The Employee Retention Credit (ERC), introduced as part of the CARES Act in March 2020, offered a financial lifeline to business owners who retained employees during the COVID-19 pandemic and paid qualified wages to some or all employees after March 12, 2020 and before January 1, 2022.
The refundable credit amount would vary depending on the number of employees the business employed & the wages paid during this time period.
Unless you have refrained from engaging with any form of media (radio, television, social platforms etc.), then you might not have heard of this credit. Many business owners would even be bombarded with phone calls, solicitation emails and even junk mail from companies whose sole focus was to offer their services in assisting businesses obtain this credit for a percentage of the credit they would be receiving. Sounds good right? Well, the process isn’t as simple these companies would want you to believe.
If you have applied or are in the middle of the application process, you know the daunting amount of paperwork there is to get approved for this credit. It may not seem like a lot if you engaged a company to work on your behalf, but on top of the legal forms & disclosures, you also have to: revise all Employer Quarterly Tax Returns (known as IRS form 941) for each quarter’s payroll you will receive credit for, revise your 2020 and/or 2021 business tax returns and depending on your corporate tax structure, revise your personal income tax returns for the years that are impacted. Since this is a refundable credit, you will be paying taxes on the money received. The amount of tax being paid will vary depending on your effective tax rate.
Related Article: Transform Your Financial Future With Guirguis & Gibbs, Inc.
After all of this, do you think you are out of the woods? Not by a longshot! The IRS has notified tax practitioners that they will be conducting frequent ERC audits in response to an increase in abuses & scams associated with obtaining this credit. The IRS audits will involve a thorough examination of supporting documentation, records and calculations that were used to arrive at the credit refunded. They will also be reviewing all tax returns that have been amended as a result of the credit received to ensure that the revised tax liabilities are correct.
If you received the ERC and the IRS has chosen to audit you, these are key items you need to consider:
- Document Retention: Make sure you have all of your supporting documentation in an organized fashion that substantiates your eligibility for the supported ERC amount you received. This includes: payroll records, financial statements, tax returns and any other relevant documents. Proper recordkeeping is vital to withstand any scrutiny during an audit.
- Understanding Eligibility: Part of the ERC process is having a clear understanding of why you were eligible to receive the refund to begin with. Knowing how you were able to qualify is key and thus, being able to support your reasoning is necessary. For many businesses, a common factor was a decline in their revenue because of government mandates. Whatever the issue was, be prepared to provide your reasoning.
- Reviewing & Reconciling Data – Go back and review your accounting records on how your arrived at your final numbers because of the credit. Ensure proper adjustments, entries and associated expenses have been made. Re-familiarizing yourself with your accounting records will allow you to answer questions confidently without wasting time searching for the answer.
- Professional Guidance: Given the complexity of the ERC regulations and the consequences of non-compliance, facing an audit can be overwhelming. Seek out the professional guidance of a tax practitioner or certified public accountant who has expertise dealing with the ERC and understands the tax implications it has on you and your business.
Facing any audit can be intimidating, especially if you don’t know how to prepare or what to anticipate. That’s why our approach is to step in and deal with the IRS directly on your behalf. We know how to navigate the complexities of an audit and establish a strategy that minimizes the burden on you so that you can focus on doing what you do best: running your business.
Guirguis & Gibbs Inc. is located at 27819 Smyth Drive Floor 2. Valencia, CA 91355. Give us a call at (661) 209-3287.
*Securities offered through Cetera Financial Specialists LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity. For a comprehensive review of your personal situation, always consult your tax and/or legal advisor. Neither Cetera Financial Specialists LLC nor any of its affiliates offer tax or legal services.
