Will Your ERC Hold Up to an Audit?
September 22, 2021
At a glance:
- Risky business: The ERC is an inherently risky tax credit that will lead to a high volume of audits over the next five years.
- Be on the defensive: The best defense against a future audit is to prepare thorough documentation now.
- Take action: Businesses should decide before a potential audit how to document and defend their ERC because waiting until the last minute could put those credits in jeopardy.
Contact Aprio today and learn how more about how our ERC team calculates and documents your credits all at once.
The full story:
Claiming the Employee Retention Credit (ERC) involves far more than just crunching numbers. Employers must navigate a complex web of qualification guidelines – such as qualified wages, employer size status, partial suspension, more than nominal impact, and more – which require subjective decisions early in the eligibility process. These gray areas all contribute to the ERC’s high potential for fraud and abuse and significantly increase the potential for audits.
The ERC can be uniquely risky
Unlike the Paycheck Protection Program (PPP), which requires an initial review and approval process by both participating lenders and the U.S. Small Business Administration, businesses can claim the ERC upfront without approval. However, ERC recipients may have the burden to prove their qualifications later if audited – sometimes much later. The American Rescue Plan Act (ARPA) extended the ERC’s statute of limitations to five years.
If someone asked you to defend a decision you made five years ago, would you be able to? Unless you keep an extremely detailed diary on your daily activities, any reasoning you come up with would be purely conjecture. The same logic applies to your ERC credit. If you face an audit five years from now, your recollection alone will not provide a sufficient defense of your credit, meaning you could face penalties from the IRS or be forced to return the funds.
Documentation is key
Your best line of defense against a future audit is to compile detailed documentation right now that outlines every decision made related to your ERC claim. Document your credit today as if an auditor is reviewing it tomorrow and avoid any last-minute panic trying to defend your credits in the future.
While this may seem like the obvious solution, the marketplace does not currently emphasize the need for ERC documentation. In fact, many payroll providers may be willing to calculate the credits, but they make companies sign a waiver assuming the responsibility for defending those credits in the future. If you used a payroll provider or other third party to calculate your ERC and didn’t receive any supporting documentation, you’re unnecessarily putting your credits at risk.
Know your risk tolerance
I cannot overstate the value of thoroughly documenting all aspects of your ERC claim, but I also concede that this process requires time and money that not all businesses feel is justified. If you’re unsure how thoroughly you need to document your ERC, consider two factors: your credit’s risk level and your business’s risk tolerance.
Certain factors will inherently make an ERC claim riskier than others. For instance, businesses with larger credits or more subjective components to their eligibility for the credit may be at a higher audit risk. A riskier credit emphasizes the need for more thorough documentation. However, some businesses may have a higher risk tolerance, meaning they acknowledge their credit claim has associated risk, yet they determine the cost of documenting the credit outweighs any benefits, or they are simply more comfortable with the risk that lack of documentation may bring.
Much like the decisions that go into calculating the ERC, the decision to document the credit is personal, based on your company’s unique position and needs.
The bottom line
The controversial and interpretive nature of many aspects of the ERC underscores the importance of working with a knowledgeable advisor that can confidently calculate and document all aspects pertinent to substantiating your credit. Aprio’s nationally recognized ERC team will never claim a credit that you can’t defend. And, unlike payroll providers and other third parties calculating the ERC, we prioritize thorough documentation to make sure you’ll be prepared in the event of an audit – whether it happens five years from now or not at all.
According to our clients, we have some of the most comprehensive documentation in the industry right now. Whether you’re just starting your ERC claim or you’re retroactively documenting it, Aprio can help.
Contact us today for a consultation with an ERC advisor.
Disclaimer for services provided relative to SBA programs and the CARES Act
Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.
The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.
Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.
You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.
In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.
Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.
About the Author
Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.