5 Reasons for IRS Audits Related to the Employee Retention Credit

While the employee retention credit established under the CARES Act (and extended under the Taxpayer Certainty and Disaster Tax Relief Act) provided much-needed financial relief for many businesses seeking to keep their employees on staff during the pandemic, businesses that claimed the credit are also at risk for facing IRS scrutiny. Combating COVID-19 relief fraud has become a top federal law enforcement priority, and this includes targeting businesses suspected of improperly claiming credits and other tax benefits.

If your New Jersey business claimed the employee retention credit in 2020 or 2021, could it be at risk of an IRS audit? Here are five examples of issues that have the potential to lead to audits and penalties:

1. Claiming the Employee Retention Credit Despite Ineligibility

Not all businesses that retained their employees during the height of the COVID-19 pandemic in 2020 and 2021 were eligible to claim the employee retention credit. For example, to qualify in 2021, businesses must have experienced either:

• “A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19;” or,
• “A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019.”

2. Improperly Calculating “Qualified Wages”

Eligible businesses were only entitled to claim the employee retention credit for “qualified wages” paid during 2020 or 2021. The CARES Act and Taxpayer Certainty and Disaster Tax Relief Act defined “qualified wages” differently for businesses of different sizes.

3. Exceeding the Maximum “Qualified Wages”

In addition to ensuring that they accurately calculated their “qualified wages,” businesses claiming the employee retention credit also needed to ensure that they did not exceed the statutory maximum credit amounts. For example, for the first and second quarters of 2021, the cap was $10,000 per employee per calendar quarter.

4. Claiming the Same Employee Retention Credit for Each Calendar Quarter

Employers were required to calculate the employee retention credit on a quarterly basis. As a result, those that consistently claimed the same credit amount may be at greater risk of facing scrutiny from the IRS.  

5. Using the Same Eligibility Criteria and “Qualified Wages” Calculations for 2020 and 2021

The eligibility criteria for the employee retention credit and definition of “qualified wages” changed from 2020 to 2021. Companies that did not address the changes implemented by the Taxpayer Certainty and Disaster Tax Relief Act may have calculated their 2021 credits improperly—and this presents risks for IRS scrutiny and penalties as well.  

Get Strategic Business Tax Advice from Managing Partner Kevin E. Thorn

If you have concerns about your business’s tax liability or the risks of facing an IRS audit related to the employee retention credit, we encourage you to get in touch. To schedule an initial consultation with tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 201-842-7696, email ket@thornlawgroup.com or tell us how we can reach you online today.