Be Prepared: The IRS Has Picked Up the Pace on Reviewing ERC Claims

Summary

After some delays, the IRS has revved up its review of Employee Retention Credit (“ERC”) claims. The IRS’s turnaround times on ERC audits are quite fast, so if you have claimed the ERC, we believe it’s important to be prepared with proper documentation well before the IRS begins its review. The time is now.

Also, the IRS recently reintroduced a second voluntary disclosure program (“VDP”) which is open through November 22, 2024. Preparing for your audit now can also help determine if the VDP is right for you.

ERC Audits and Denials

As the IRS continues to process and pay valid ERC claims, the IRS also continues to deny many ERC refund requests that they deem improper. ERC audits move quickly, starting with detailed inquiries that typically have up to 30 days for a response. Moreover, taxpayers that do not meet the IRS’s standards are issued ERC disallowance letters (“105-C”), with a limited time for appeal. Based on our experience certain areas of ERC are under heightened scrutiny, such as:

• Documentation of full or partial suspension with governmental shutdown orders and their specific effect on the business.
• More than the nominal impact of those government shutdown orders on the business.
• Aggregation of a control group, which may impact gross receipts, employees, and overall credit eligibility.
• Tax-exempt organizations.
• Federally disregarded entities (e.g., single-member LLCs and Q-subs) potentially receiving denial letters because they do not file federal income tax returns.
• Reliance on supply chain disruptions.

Act Now – What You Can Do to Prepare for a Potential Future ERC Audit

Upon the receipt of a 105-C disallowance letter, taxpayers are provided with a limited window to respond to IRS audit inquiries (often 30 days or less from the date of letter issuance). Given the brief period to respond, in-depth analysis, and heightened scrutiny by the IRS, we recommend that taxpayers prepare an audit-ready package in advance to avoid potential delays or denials. This package should include responses to IRS’s common questions and document requests.

If you are unprepared for an audit, our team is available to confirm and document ERC eligibility for any applicable quarters. Our team may assist in reviewing your original ERC claims and documentation of eligibility by preparing any audit binders in the event of a future audit and/or disallowance by the IRS. Proactive planning provides the ability to reduce your administrative burden in supporting valid ERC claims pursuant to aggressive IRS practices. Our team may also assist in any other IRS controversy matters.

Current VDP Period Open Through November 22, 2024

Moreover, reviewing your audit readiness now is important because the IRS has offered taxpayers a chance for taxpayers who may not qualify for the ERC to give back funds that they have already received while retaining some of the funds and avoiding penalties. Taxpayers have until November 22, 2024, to apply and retain a portion of the credits up to 15% of ERC refunded, along with retaining all interest paid for all applicable quarters in 2021 under the VDP. The IRS may also provide installment payment plans for the VDP repayment of ineligible refunds. Please contact our team to verify ERC eligibility for any applicable quarters in 2021 and if VDP should be pursued. While VDP requires repayment of refunds, it would also lessen exposure for your business and avoid future audit risk, along with significant underpayment penalties and interest.

NOW! Expertise

If you have any additional questions or require ERC support, contact our ERC team now.

Mike Shaikh

Kimberley Peterson McGuire

Sharvil S.

Steve Kralik

Ivan C. Yates, J.D., MST