ERC Audit Risk Complete Guide (IRS Penalties, Statute of Limitations, & What to Do)

During COVID, many businesses were given access to the Employee Retention Credit (ERC) to help ease their tax burden. Since then, a business may receive a 6612 letter outlining an audit of the ERC claim.

These letters, like audits in general, can be very disconcerting, disrupting business and causing undue stress and worry. Many business owners wonder, ‘What to do if I’m audited for ERC’?

In it, we cover the likelihood and reasons for getting audited, the potential penalties, and the statute of limitations on different years the ERC is claimed. 

Will My ERC Claim be Audited?

When you file for the Employee Retention Credit (ERC), there’s always a chance the IRS will audit your business. 

There’s no exact way to calculate your chances, but the IRS is keen to examine ERC claims in order to verify that each business meets its stringent criteria. 

Your chances of being audited increase with the number of red flags the IRS finds in your submission, including:

1. Inconsistent or mismatched figures.
2. Incomplete information in the application.
3. Unusually large claims compared to previous tax returns or other companies of the same size in the same industry.

Finally, the more thorough and accurate your final submission, the lower your likelihood of being audited.

How Will I Be Audited for the ERC by the IRS?

You can expect to have a comprehensive investigation into all your business’s financial documents when audited by the IRS. 

The primary goal of an ERC audit is to verify the accuracy and authenticity of the tax claim. To do so, the IRS will want to look at the following documents:

1. Payroll records: these provide details of wages paid to employees during the tax period of the claim.
2. Employment tax returns: these detail your tax obligations and contributions from employees.
3. Official government orders: Documents proving government-mandated business suspensions, such as for COVID-19.
4. Financial statements: Profit and loss statements are used to demonstrate significant declines in gross receipts and establish ERC eligibility.
5. Previously filed tax returns: Previous returns allow for cross-verification with current claims, ensuring consistency in tax reporting.
6. Correspondence with the IRS: Any previous IRS interactions can provide context for your current ERC claim.

Maintaining detailed and well-organized records is the key to completing an audit as smoothly and painlessly as possible.

Of note is the voluntary disclosure program, whose original deadline passed on March 22nd. It allowed a business to withdraw their claim to the ERC, if they felt you’ve made it mistakenly - showing how widespread the issues with the credit are.

What is the Risk of an ERC Audit?

The potential repercussions of an audit can be significant, especially if something has gone wrong with one’s tax filings. 

Generally speaking, the main risk a business faces during an ERC audit is an adjustment to its claim. This is the standard ERC audit penalty.

An adjustment is simply the paying pack that you owe to the IRS after they correct any discrepancies, plus some interest.

However, you may face greater penalties if your return contains significant errors. Specific penalties are generally proportional to the severity of the inaccuracies. 

What To Do If You Get Audited for ERC

1. Review Your Audit Notice (6612 Letter)

A 6612 letter is your notice of an impending audit of your ERC claim. The document will outline the specific areas of your ERC claim that the IRS has found warrants further investigation.

2. Gather Your Documents

Once you’ve gotten your ERC audit notice, gathering all the appropriate documentation is the next big step.

A quick summary of the documents you’ll need includes:

1. Payroll records
2. Employment tax returns
3. Official government orders
4. Financial statements
5. Previously filed tax returns
6. Previous correspondence with the IRS

3. Speak To A Licensed Tax Attorney

Consulting with a licensed tax attorney can provide expert guidance to ensure your defense is airtight and eliminate most surprises. 

They can help you protect your rights and offer the best strategies to keep the damages as low as possible. 

Other Useful Tips If You Get Audited

1. Swift Response: When the IRS requests additional information, responding promptly can help your case. The IRS may reject the claim if documentation is not sent within 30 days. Of course, accuracy is also important, so don’t rush too much.
2. Review all Relevant Documentation: Read the IRS FAQ on the topic. Double-check all the calculations yourself for your documentation. Be prepared for any questions you might receive about your tax claim.
3. Appeal the Decision: In some cases, it makes sense to make an ERC audit appeal, especially if your tax attorney finds discrepancies with their investigation of your claims.

ERC Statute of Limitations - How Long After Filing Can The IRS Audit Me?

In most cases, the IRS can audit a business for up to 3 years after an ERC claim has been made (or 6 years if H.R.7024 passes).  However, it has five (5) years for ERCs for payroll returns filed in the last two quarters of 2021. In addition, there is no statute of limitations on audit returns that examine potential fraud. 

The deadlines for the original dates of the ERC are as follows. However, most businesses have filed amended taxes since then. For amended payroll returns, the three-year deadline resets to the day you file the amended return. 

• Q2 2020: April 15, 2024
• Q3 2020: April 15, 2024
• Q4 2020:  April 15, 2024
• Q1 2021:  April 15, 2025
• Q2 2021:  April 15, 2025
• Q3 2021:  April 15, 2027
• Q4 2021:  April 15, 2027

What Are the ERC Audit Penalties for a False Claim?

Penalties vary depending on the nature and degree of the issue but typically involve a fine of 20% to 75% of the claim’s value.

Generally, you can expect to repay the amount owed with interest for any incorrectly claimed amounts. 

However, there are much more severe penalties for gross negligence and intentional fraud. In cases of severe fraud, significant fines and even jail time are possible. 

Frequently Asked Questions

What Triggers an ERC Audit by the IRS?

An IRS ERC audit can be triggered by the following:

• Your application contains discrepancies: Such as mismatched figures or incomplete details, that raise questions about the accuracy of your claim.
• You fail to meet the eligibility criteria: Whether through misunderstanding the requirements or through oversight.
• Your claim significantly deviates from typical claims within your industry: Either in terms of the amount claimed or the circumstances cited for eligibility.

How Long Does An ERC Audit Typically Take to Complete?

The timeframe for an ERC audit varies widely, typically within a few months to a year. It depends on the following:

• The complexity of your case: Including the volume of documents in the case and the number of issues to be resolved.
• Your responsiveness to IRS requests for information: The longer you take to get back to the IRS, the longer the whole process will take.

How Far Back Can The IRS Audit ERC Claims?

The IRS can audit ERC claims for up to three (3) years from the day they are filed. 

Exceptions exist for last two-quarters of 2021 claims, which may be audited for up to five (5) years, and for any case that involves significant errors or omissions that indicate potential fraud. 

Can I Appeal the ERC Audit?

Yes, you can appeal an ERC audit. The appeal process allows you to gather together and bring more evidence to support your claim and argue against the IRS’s findings.

It’s essential to consult with a tax professional to decide whether an appeal is in your best interest and how to proceed, as the cost can be substantial.

How To Take Action Towards Your ERC Audit - Next Steps

1. Carefully review your ERC claim and audit notice. 
2. Gather all your documentation and double-check for discrepancies.
3. Consult with a tax professional or attorney.
4. Prepare for possible adjustments.

ERC audits can be stressful, but by understanding the risks and making a plan, you can make it out unscathed. We hope our ERC audit risk guide has helped put your worries at ease.

Once you’ve done everything you can on your end, consider consulting with a knowledgeable team such as the one at RevenueSafe.

Then, you can feel confident that you’ve done everything possible to protect your business.