Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021,
Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
Qualified as a recovery startup business for the third or fourth quarters of 2021.
Sections III.C. and III.D., Questions and Answers 10 through 22 – Suspension of operations due to orders from an appropriate governmental authoritySection III.E., Questions and Answers 23 through 28 – Decline in gross receipts during 2020. Read more
The IRS issues alerts to educate about tax risks, like scams and identity theft, stressing the need for vigilance, authenticity verification, and staying informed to protect finances and tax compliance.
The Employee Retention Credit (ERC) – sometimes called the Employee Retention Tax Credit or ERTC – is a refundable tax credit for Read more
Notice 2021-20 provides guidance on the employee retention credit provided under Section 2301 of the Read more
Guidance on the Employee Retention Credit under the CARES Act for the First and Second Calendar Quarters of 2021. (Notice 2021-20) This notice provides Read more
The ERC isn't subject to Single Audit. Single audits, also known as Uniform Guidance audits, are specific types of audits required for entities that expend federal awards, grants, or financial assistance from the U.S. federal government. The ERC is a federal tax credit, NOT one of these.
ERC AUDIT PENALTY GUIDANCE:
An ERC audit penalty can result in additional tax
liabilities, interest charges, and potential legal
consequences:
Underpayment of taxes: Businesses may be required to pay back the erroneously claimed ERC amount, resulting in additional tax liabilities.
Accuracy-related penalties: In cases where the IRS deems that the errors were due to negligence, disregard of tax rules, or substantial understatement of income, accuracy-related penalties may be imposed. These penalties are calculated as a percentage of the underpaid taxes.
Interest charges: The IRS may assess interest charges on the underpaid taxes from the due date of the tax return until the date of payment.
Potential legal consequences: In cases of intentional fraud or willful misconduct, businesses may face criminal charges, including fines and imprisonment.
The penalty for false ERC claims is 20% of the excessive amount claimed. For example, if your ERC claim is $6,000 but, in actuality, your eligible amount was only $5,000, the excessive amount is $1,000 and your penalty is $200 (20% of $1,000).
In addition, the IRS may apply an "accuracy-related penalty if there is not a reasonable cause." Moreover, interest on any ERC penalty could be applied
Note that this penalty isn't specific to the ERC but is the IRS' general guidance on false credit claims.
If the IRS selects you for an ERC audit, it will send an audit notice to your last known address. If you claimed this credit and you have changed your address since the last time you filed a tax return, you should update your address with the agency. Otherwise, you may miss the audit notices. If that happens, the IRS may disallow the credit and assess a tax liability without you even realizing what’s going on.
The audit notice will explain the type of audit, the issues being audited, and the next steps you need to take. Here are the main types of ERC audits:
Correspondence — You mail the auditor documents that back
up the details on your payroll tax return, and you handle
most of the process through the mail.
Desk — The audit notice instructs you to set up a phone
meeting with the auditor. Then, you send in supporting
documents and talk about them on the phone.
Field — The auditor comes to your place of business to
conduct the audit. This is likely to be rare (but not
impossible) with ERC audits.
Often, the notice will include an Information Document
Request (IDR). This outlines the documents you need to
provide and tells you where to send them
The employee retention credit didn’t just affect your payroll tax returns. It also had implications for your business income tax return and potentially your personal income tax return.
Here’s why. If you claimed the ERC, you were supposed to reduce the wage expense on your business income tax return by the amount of the credit. For instance, say that your wage expense was originally $100,000, and this was the amount you reported on your business income tax return. Then, you amended your payroll tax returns and claimed a $20,000 ERC.
At this point, you should have amended your business income tax return to reduce your wage expense from $100,000 to $80,000. This, in turn, would have increased your profits by $20,000 and thus increased your tax liability.
The ERC auditor may look at your business income tax return to see if it accurately reflects the ERC. If not, they may adjust your income tax return. If you’re a sole proprietor, the adjustment will be to your schedule C, and it will automatically adjust your personal income tax liability. If you file a partnership, S-corp, or corporate return, you will need to make the changes to those returns and then make additional adjustments to your personal income tax return.
What if the auditor looks at your documents and decides that you don’t qualify for the ERC? Then, they will issue an audit report that details the changes to your payroll tax return, and they will let you know how much you owe.
At this point, you can protest the changes, but you must do so quickly. Usually, you only have 30 days to appeal an audit decision, and if you miss the deadline, you won’t be able to appeal.
ERC Audit Penalties
If you “fail” an audit, the auditor may also add penalties
to your account. If they believe that you were negligent
in following the tax laws, they may apply a 20%
accuracy-related penalty. This is 20% of the underreported
tax. In cases of fraud, the penalty is 75% of the tax.
The IRS can bring criminal tax fraud charges against people who attempt to defraud the government by illegitimately taking false tax credits. This is rare, but it can lead to prison time and up to a $100,000 fine for individuals and a $500,000 fine for corporations.
The IRS has extended the statute of limitations on payroll tax returns from the last two quarters of 2021 from three years to five years. This means that the agency has until April 2027 to audit these returns. The statute was extended with the American Rescue Plan Act.
At the time of writing, the IRS has not extended the statute of limitations for the other six quarters during which employers could claim this credit. However, the agency has put this request on its 2024 agenda. It is highly likely that the statute of limitations may change from three years to five years on these returns
For most returns, the statute of limitations starts on the later of the due date or the date you file. However, with payroll returns, the timer starts on April 15 following the year the quarter occurred. For instance, Q1, Q2, Q3, and Q4 payroll returns for 2020 were due on April 30, 2020, July 21, 2020, November 2020, and February 2, 2021, and the statute of limitations for auditing these returns started on April 15, 2021. Currently, the IRS has until April 15, 2024, to audit these returns, but if the agency extends the statute, it will have until April 15, 2026.
If you filed an amended return after the due date, the statute of limitations typically starts on that day.
