Employee Retention Credit Audits Archives

As we inch closer to the end of 2023, another mandate will be imposed on businesses, whether you just started out or you have been in existence for many years. This requirement will enforce the new beneficial ownership information mandated by the Corporate Transparency Act of 2021. These new reporting requirements will be phased in two calendar years: 2024 & 2025. Under these new reporting requirements, business entities that are required to comply must report specific information about certain owners and officers to the United States Treasury Department’s Financial Crimes Enforcement Network (also known as FinCEN).

The information that will initially be collected by FinCEN will be used by a multitude of government organizations in order to combat persistent issues across the globe such as: money laundering, tax evasion and human trafficking. Failure to comply with this new mandate can result in being fined $500 per day in civil penalties and up to $10,000 per day in criminal penalties and/or being imprisoned for up to 2 years, so it is vital to understand how to remain in compliance at all times. You might be thinking that if the entity is penalized, the beneficial owner is free from liability. Well, FinCen has made it clear that it can not only levy penalties against the entity but against any beneficial owner as well. At the time of writing this, FinCEN estimates that there are 32 million entities that will have to comply with these new mandates, with a few million more new entities that must file reports each year.

The good news is that most larger companies do not have to comply with this mandate. The bad news is that companies that are not exempt from reporting will be held responsible for obtaining and reporting personal information on all individuals deemed to be a beneficial owner. The complexity in all of this is constantly making sure that all beneficial owners’ personal information is updated with FinCEN on an ongoing basis. The more beneficial owners there are in an entity, the harder it will be.

So, by now you are probably asking yourself, who is required to comply with the reporting mandate? Per FinCEN, the definition of a reporting company is quite broad and expansive, leading most small to medium-sized businesses to be subjected to these reporting requirements. Not sure whether these reporting requirements will apply to your business, according to FinCen their motto is simple: when in doubt, report. If you are unsure if an individual would be considered a beneficial owner, it is in the entity’s best interest to report them to avoid being hit with any penalties later on.

The first step in determining whether a company is required to report is defining what a reporting company is. According to FinCen, a reporting company is:

A domestic corporation, LLC (including a single member LLC) or other entity that is created by filing documents with a Secretary of State’s office or similar office under the law of the state.
A foreign corporation, LLC, or other entity formed under the law of another country and registered to do business in any state by filing a document with a Secretary of State or similar office.

Didn’t I say the definition of a reporting company is broad? You are probably thinking to yourself that this would include any business that operates within our 50 states & U.S. territories, such as Puerto Rico, Guan, and any other commonwealth territories. Lucky enough, FinCen also established rules for entities that are exempt from having to report, which include but not limited to:

Large operating companies (with at least 20 full-time U.S. employees)
Inactive entities (meeting certain criteria)
Security dealers or brokers
Investment companies and advisers registered with the SEC
Tax-exempt organizations (those organized under a 501(c), political organization or charitable trust)
SEC reporting issuers

Additional exemptions can be found on the FinCen website: https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet

For entities that were formed in 2024, the entity must reporting information about the entity’s applicants. This could be one of two people:

The individual who would directly file the document that registers the company.
The individual who is responsible for directing the filing documents by another.

For entities that were formed before 2024, do not have to report company applicant information.

This is a lot of information to digest but it is important you stay informed and ensure you are meeting FinCen’s reporting requirements. Be on the lookout for Part 2 of this article which should be out shortly.

If you are confused with any of the reporting requirements, do not hesitate to reach out and make an appointment with us.

Guirguis & Gibbs Inc. is located at 27819 Smyth Drive Floor 2. Valencia, CA 91355. Give us a call at (661) 209-3287.

*Mark Guirguis is a Registered Representative of 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.

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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.

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.

Employee Retention Credit Audits

New Mandatory Ownership Reporting Requirements: The Good, The Bad and the Downright Complex – Part 1

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Employee Retention Credit Audits – What You Need to Know

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.

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