The Employee Retention Credit (ERC) was introduced during the COVID-19 pandemic in 2020 to help affected businesses keep employees on payroll through a refundable tax credit for eligible employers. There has been significant guidance issued by the IRS, with additional considerations coming down the line.
ERC claims are expected to be a hot topic of IRS examinations.
It is important that the taxpayer feels confident in the ERC-related position they are taking, and that they have the proper documentation to support that position and the calculation itself.
Here are a few important items to note:
- There is a 5 year statute of limitation for examination of taxpayers claiming the ERC.
- Be careful of scams involving third parties targeting and pressuring ineligible taxpayers to file ERC claims.
- Taxpayers claiming the ERC should have in their possession all documents supporting the position taken and the amount claimed. Examples of documents that may be requested and questions that may be asked during an ERC-focused examination include:
- Copies of schedules prepared to calculate the credits.
- Payroll reports listing employees and wage amounts for the time period the credit is being claimed for.
- Documents should support that wages of related individuals as defined for purposes of this credit were not used as eligible wages for the ERC.
- Documentation supporting qualified health plan expenses used as part of the credit, if applicable.
- Information necessary to determine whether the taxpayer is considered a “large employer” for purposes of the ERC.
- If the taxpayer is considered a “large employer” for purposes of the ERC, you will need to provide support reflecting the employees were not providing services during the time period the credit was being claimed for.
- Documentation that operations were fully or partially suspended by an appropriate governmental authority if this is the premise for eligibility of the ERC claimed.
- Copies of applicable governmental executive orders.
- Information/Postings from relevant government websites should be saved in static form as information on websites may not be available indefinitely.
- Documentation that a taxpayer experienced a significant decline in gross receipts during the applicable quarter if this is the premise for eligibility of the ERC claimed.
- Copies of quarterly income statements for the measurement period and the quarters that the credit is being claimed for.
- All documents related to Paycheck Protection Program (PPP) loans, such as applications for PPP loans and PPP loan forgiveness, and a copy of the PPP loan forgiveness confirmation letter, if applicable.
- Workpapers should contain documentation supporting that there was no double dipping on wages used to claim the ERC with other interrelated tax benefits such as the PPP loan, and paid sick and family leave credits.
- The above list is not all inclusive and, based on initial information provided, additional document requests and questions may follow.
We’ll continue to keep you updated on any additional considerations. In the meantime, please free free to reach out to the Cg Team with any questions.