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IRS Pauses Employee Retention Credit Amid, Audits to Follow

The employee retention credit (ERC) is a refundable tax credit available to businesses to cover employee compensation and healthcare benefits paid during portions of 2020 and 2021. This credit is available primarily to businesses that were ordered to shut down due to the COVID-19 pandemic or who suffered a significant decline in gross receipts. Since this is a refundable credit, even businesses without any tax liability in those years have been able to benefit.

Unfortunately, due to the confusion surrounding eligibility, many scammers have encouraged businesses who did not qualify for the credit to apply. Now, with the news that the IRS is pausing ERC claims due to the rising number of fraudulent claims related to the credit, the number of ERC audits is expected to have a significant rise.

Why the uptick in IRS audits?

Unfortunately, due to mass confusion, or unethical filers, many businesses claimed the ERC despite not qualifying. In many cases, the businesses either did not suffer a large enough decline in gross receipts or were not considered to be affected by government orders in response to COVID-19. This, coupled with a high number of promoters promising huge refunds as a result of the ERC, has caused chaos both for businesses that applied for the credit and for auditors reviewing the returns. With more than 2.5 million U.S. businesses having claimed the ERC since its inception, the IRS has flagged many returns for fraud, leading to further scrutiny of returns claiming the credit. In fact, the credit has been so ripe with fraudulent claims that the IRS announced this month that it will pause reviewing all claims of the credit until next year.

How can I protect my business and ensure compliance?

It goes without saying, but the best way to ensure compliance for your business is to provide accurate reporting. Many businesses under audit are left paying penalties and interest merely because they failed to keep detailed bookkeeping records. Additionally, whether your business is under audit, out of compliance, or even filing its annual return, working with a trusted tax professional is crucial. Unlike many ERC promoters, whose profit is determined by the taxes saved as a result of claiming the credit rather than a fixed fee for preparing the return, a trusted tax professional can protect your business by providing accurate reporting.

ERC audit, what should I do?

Receiving a letter from the IRS stating your business is under audit can be anxiety-inducing, but fear not, there are steps you can take to make the process easier. When under audit, the most important step to take is to not go into the audit alone. Having a qualified tax professional assisting you with your examination not only helps the audit take less time but, in many cases, can reduce or prevent any additional tax, penalties, and interest from being assessed. A seasoned tax professional can also assist in safeguarding your business from the IRS should it seek to examine subsequent years. If you received a notice from the IRS stating that your ERC claim is under audit, contact Hone Maxwell LLP for assistance. Our seasoned tax professionals can help you navigate your audit and assist you with protecting your business.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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