The IRS warned employers to be wary of claiming the Employee Retention Credit (ERC) when they may not qualify. Audit risk is real.
What is the likelihood that you will be audited for claiming the Payroll Refund?
Is the risk of IRS Audit real?
Study
IR-2022-183
Employers warned to beware of third parties promoting improper Employee Retention Credit claims
The likelihood that you will be audited by the IRS depends on a number of factors.
Objective Criteria
If you claim or receive a Payroll Tax Refund you must absolutely meet the following eligibility criteria. If you did not, you must assume that the IRS will audit you. At a minimum:
- You were a trade or business that operated in 2020 or 2021
- You continued paying employees while fully or partially shutdown due to the COVID-19 pandemic, or had significant declines in gross receipts in 2020 or 2021
- You or your payroll company filed quarterly payroll tax returns (Form 941) and you paid the IRS the associated payroll taxes
- If you owned the majority of your business, you must not have claimed ERC for yourself or family members on payroll
Subjective Criteria
If you claim or receive a Payroll Tax Refund without meeting the gross receipts test, you must have formally analyzed and documented, at a minimum:
- That you sustained a full or partial suspension of operations due to orders from an appropriate governmental authority
- That the circumstances of your partial shutdown impacted “more than a nominal portion of your business operations”
Insights & Perspectives
The risk of audit by the IRS is real. Assuming, however, that you have properly followed the authoritative guidance and claimed the ERC in good faith, the consensus by industry tax professionals is that the likelihood of an inquiry by the IRS is approximately three percent (3%).
- Important. Inquiries may be either Information Document Requests (IDRs) or formal audits. These are not the same. If you properly documented your ERC claim the IDR process should be straightforward. There should not be anything in an IDR not already in your workpapers that the IRS is asking for (e.g. the ERC computations, eligibility documentation, specific government orders that directly impacted your business…)
Kept employees during the Pandemic?
Claim your Payroll Tax Refund of up to $26,000 per employee
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