Tax audit consultant working on tablet and paperwork

Preparing for an IRS ERC Audit: What You Need to Know for Your Client

Reading Time: 6

As a Certified Public Accountant (CPA), it is crucial to stay informed about the intricacies of tax laws and regulations to guide your clients effectively. With the introduction of the Employee Retention Credit (ERC) as part of COVID-19 relief measures, it is important to understand what your clients may face if the Internal Revenue Service (IRS) decides to audit their ERC claims. This article aims to provide you with insights into the IRS audit process, recent trends of increased audit activity, and what you and your clients should expect.

Recent Increase in IRS ERC Audits

In recent news, the IRS has significantly ramped up its audit activities, targeting various tax-related issues, including ERC claims. The agency’s increased focus on auditing ERC claims stems from the substantial amount of funds involved and the potential for errors or fraudulent claims. It is crucial for CPAs and their clients to be aware of this heightened scrutiny.

Understanding the Reasons for Increased ERC Audits

The IRS has cited several reasons for the surge in audit activity. First, the implementation of COVID-19 relief programs, including the ERC, has introduced complexities in tax filings and increased the potential for errors or fraudulent claims. Second, the IRS aims to ensure compliance with tax laws and prevent improper use of government funds. Last, the agency seeks to close the tax gap and collect revenue owed to the government.

Preparing for Increased ERC Audit Activity

Given the increased focus on ERC claims, CPAs should proactively prepare their clients for potential audits. Encourage clients to maintain accurate records, follow eligibility guidelines, and maintain proper documentation to substantiate ERC claims. By ensuring clients are well-prepared, CPAs can help mitigate potential issues during an audit.

Collaborating with Clients

As a CPA, it is essential to collaborate closely with your clients throughout the audit process. Stay informed about the latest IRS guidelines and regulations related to ERC claims. Review clients’ ERC claims thoroughly, ensuring accurate calculations and supporting documentation. By working closely with clients, you can address any potential issues before an audit occurs and minimize the risk of penalties or adjustments.

Responding to Audits

If your clients are selected for an audit, it is crucial to respond promptly and professionally. Gather all relevant documents, such as payroll records, financial statements, and supporting evidence for ERC claims. As their CPA, you can represent your clients during the audit process, providing explanations and justifications for any discrepancies or queries raised by the IRS.

Many of the ERC Audits are from Service Centers

Be aware that many of the IRS ERC audits of the ERC are being conducted as correspondence audits from the Service Centers.  These types of audits are just as important as those assigned to Field Revenue Agents.  Prompt attention to the document requests contained in the letters is necessary and you and your client should respond promptly as the Service Center has the authority to issue claim denials in full or in part.

Conclusion

With the recent increase in IRS audits, CPAs must stay vigilant and well-prepared to assist their clients with ERC claims. By ensuring compliance with tax laws and maintaining accurate records, CPAs play a crucial role in helping clients avoid penalties and resolve any issues that may arise during an audit.  If the IRS has already contacted your client and notified him/her that it is commencing an audit of their ERC claims, the Tax Controversy Group at Omega is able to represent your client before the IRS during the audit and any appeals process that might occur.  The head of our Tax Controversy Group, Tracy Martinez, is an attorney with over thirty years of experience with the U.S. Department of Justice, Tax Division, and the IRS Office of Chief Counsel.  Ms. Martinez and her team are experts in the ERC rules and guidance and are ready to help you resolve your issues.

About the Author Tracy Martinez, 
Tax Controversy Attorney
Tax Controversy Attorney leading the new Tax Controversy Practice at Omega, Martinez brings 35 years of tax legality expertise, serving as Senior Attorney within the Tax Division of the U.S. Department of Justice (DOJ) and Senior Attorney within the Office of Chief Counsel for the Internal Revenue Service (IRS). She holds an LLM from Georgetown University Law Center, JD from Albany Law School at Union University, and a BA in International Relations from Colgate University. Martinez enjoys aiding clients across the various stages of IRS examinations, from dispute avoidance to issue resolution and post-exam improvements.