Oct 19, 2023

ERC Audits On the Rise: Are You On the IRS’s Radar?

Sponsored Content provided by Gretchen Roberts - CEO, Red Bike Advisors

If you’re anything like most small business owners we work with, you’ve got better things to do than scroll Google for news about the IRS and what it’s been up to lately. 
So, in case you missed it, our federal taxing authority made big headlines last month when they completely halted new Employee Retention Credit (ERC) processing because so many fraudulent claims have been filed – and announced that fraudulent ERC claims are on their “dirty dozen” list of tax scams.
As of July 31, 2023, IRS Criminal Investigation has initiated 252 investigations involving over $2.8 billion of potentially fraudulent ERC claims. Of those, fifteen have resulted in federal charges with six convictions and jail time. In other words, they want more than just a monetary payback. 
ERC Had Good Intentions, But….
Let’s take a quick time machine back to 2020, the year no one wants to remember. In March, Congress passed the CARES Act, which included a provision via the ERC to help businesses that had been shut down due to Coronavirus regulations retain their employees. Unfortunately, during that dizzying time, the IRS didn’t have much in the way of guidance for who qualified and how. 
Even when the IRS issued additional guidance, it was very much subject to interpretation. This spawned a bunch of “ERC Credit Mills” — aka pop-up shops with aggressive marketing tactics promising an easy application process, large credit claim amounts, and either large upfront fees or fees based on a percentage of the credit.
We’ve written about these ERC credit mills before to warn business owners not to fall for these marketing tactics. When the IRS notice comes, those providers will be long gone and you’ll be left with the fallout of a mess you don't even understand. 
But don’t worry; hardly anyone was clear on ERC when it first came out, and while guidelines have been issued, even the IRS admits that the ERC is a “complex credit.” 
If You Filed an ERC
Given the current situation, you’re either sure you qualified, or you’re not sure. If you worked with your regular, trusted accountant or tax professional to determine your qualification for the ERC, you’re probably safe to adopt a “wait and see” position as the IRS works through its audits. 
But if you’re not sure you qualified properly, it’s time to take swift action. If it turns out you filed a larger claim than your business was properly qualified for, it’s much better to proactively contact the IRS and take voluntary steps to resolve the issue. 
The alternative? Wait for a notice and subsequent IRS examination, which will certainly include not just paying back the credit, but also penalties. 
The Bottom Line
If it sounds too good to be true, it probably is. Beware the ERC credit mills, and consider re-examining your ERC qualification with a tax resolution professional. 
You shouldn’t hesitate to take a legitimate credit like ERC, which was a much-needed boost for small business owners during COVID. But do it with the help of an experienced tax advisor who applies the credit to your specific situation. 
If you claimed an Employee Retention Credit and have questions about whether you’re in compliance–or if you’ve already received an audit notice–we can help you investigate your options. Contact us at redbikeadvisors.com

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