The Employee Retention Tax Credit (ERTC) was a financial lifeline for businesses that kept employees on payroll during the pandemic, but it has also become a source of stress. The IRS has cracked down on ERTC claims due to widespread fraud, launching audits that have caught even well-intentioned Washington business owners in the process.
Many small business owners who properly claimed the credit are now facing complex IRS audits, unsure of how to defend their position. If your business claimed the ERTC, understanding how to prepare for an audit can help you protect your company and avoid unnecessary penalties.
How Likely Is an Employee Retention Tax Credit Audit?
An ERTC audit depends on multiple factors, including your business’s eligibility, calculating the credit, and whether your documentation supports your claim. The IRS has increased scrutiny of ERTC claims, particularly for businesses that relied on third-party services to process applications or that claimed unusually high amounts. The best way to avoid an audit is to ensure that your claim is legitimate, that all supporting documentation is in place, and that your tax filings are in order. Businesses that accurately reported their eligibility and maintained detailed records have a lower chance of being flagged for review. You will receive letter 6612 if your business is facing an audit.
Preparing for an ERTC Audit
A business under ERTC audit must prove that it was eligible for the credit and correctly calculated the amount claimed. This means showing financial records that align with pandemic-related revenue declines and demonstrating how government orders affected business operations.
Washington State businesses faced several executive orders during the COVID-19 pandemic that significantly impacted operations. Governor Inslee’s Stay Home, Stay Healthy order in February 2020 shut down non-essential businesses, leading to revenue loss across industries. Later, restrictions on indoor dining and gathering limits forced restaurants, event venues, and service providers to operate at reduced capacity. The phased reopening plan meant that even as businesses reopened, they did so under strict guidelines that affected customer flow and revenue. Businesses that retained employees during these disruptions and meet the eligibility criteria should be prepared to show how these mandates directly impacted their operations.
Proactive Measures Form a Strong ERTC Audit Defense
A strong audit defense starts with detailed records that clearly demonstrate your business’s eligibility and compliance with the program’s requirements. Keeping payroll records, financial statements, and regulatory documents organized will make it easier to respond to IRS inquiries. Businesses should also periodically review their records to ensure accuracy, consult with legal and financial professionals to stay updated on regulatory changes, and conduct internal audits to identify potential concerns before they become problems.
Get the Legal Guidance You Need to Keep Your Business Out of Tax Trouble
The IRS is aggressively auditing businesses that claimed the ERTC, and even those that followed the rules need to be prepared. If your business receives an audit notice, having the right legal support can make all the difference. Robert V. Boeshaar, Attorney at Law, helps small business owners confidently navigate tax disputes. Contact our office today to discuss your situation and protect your company’s financial future.
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