Brotman Law May 11, 2024 17 min read

Employee Retention Tax Credit Audit Defense for Arizona Businesses

How Businesses Can Protect Themselves Against Arizona ERTC Audits

In Arizona, where the economy is bolstered by industries such as technology in Phoenix, tourism in Sedona, and agriculture in Yuma, the Employee Retention Tax Credit (ERTC) has provided essential financial support to businesses during the COVID-19 pandemic. This federal benefit helps companies that have managed to retain their workforce despite facing significant economic challenges. However, accessing the ERTC also places businesses under the scrutiny of potential IRS audits. For Arizona enterprises, it's crucial to understand ERTC compliance thoroughly to ensure uninterrupted benefits from the program and to handle audits effectively.

This guide will outline effective strategies for ERTC audit defense tailored to the unique economic landscape of Arizona, emphasizing the importance of proactive preparation and the critical role of legal expertise in navigating these challenges.

 

 

Understanding the ERTC in Arizona's Economic Context

The ERTC offers a refundable tax credit to employers who kept employees on the payroll during periods of financial hardship caused either by significant declines in gross receipts or due to full or partial suspensions of business operations as mandated by governmental COVID-19 orders.

Here's a comprehensive look at ten significant COVID-19 orders issued in Arizona during 2020 and 2021, under Governor Doug Ducey, focusing on how these directives impacted businesses, particularly in the context of the Employee Retention Tax Credit (ERTC) Audit.

  • State of Emergency Declaration (March 2020) - Governor Doug Ducey declared a state of emergency. This early action initiated a series of health and safety protocols and paved the way for subsequent business-affecting orders. This declaration is crucial for ERTC as it signifies the government’s recognition of a crisis impacting business operations.

  • Closure of Non-Essential Businesses (March 2020) - An order was issued to close non-essential businesses, especially impacting those in hospitality, entertainment, and retail sectors. Businesses forced to close could qualify for ERTC by showing government-mandated full or partial suspension of their operations.

  • Stay-at-Home Order (March 2020) - This order required residents to stay at home except for essential needs, dramatically reducing foot traffic to businesses and disrupting normal operations, which is a direct qualifier for ERTC eligibility.

  • Gradual Reopening of Certain Businesses (May 2020) - As part of a phased approach, some businesses were allowed to reopen with strict safety measures and capacity limitations. Despite reopening, these restrictions could support claims for the ERTC due to continued partial suspension of operations.

  • Extension and Modification of Stay-at-Home Order (April 2020) - The extension and later modifications of the stay-at-home order kept some businesses operating under limited conditions or closed longer than initially expected. This ongoing disruption supports eligibility for the ERTC as it prolonged the period of impact.

  • Mask Mandate in Public Spaces (June 2020) - Local municipalities were allowed to enforce mask mandates. This requirement often led to additional costs for businesses in enforcing these rules and could be included in ERTC calculations as an added operational challenge.

  • Enhanced Unemployment Benefits (2020) - With enhanced unemployment benefits available, some businesses found it challenging to bring back furloughed workers, affecting their capacity to operate fully. This situation could affect ERTC eligibility by demonstrating difficulty in maintaining staffing levels.

  • Temporary Ban on Large Gatherings (October 2020) - This order limited the size of public gatherings, directly affecting venues, event organizers, and related businesses. Companies affected by these restrictions are eligible for ERTC by showing a significant disruption in their business operations.

  • Vaccination Rollout and Business Operations (Starting December 2020) - As vaccines became available, businesses had to adapt to new health guidelines and the reality of a partially vaccinated workforce, which affected operational norms and customer interactions. Documentation of these changes is important for ERTC audits.

  • Lifting of Certain Business Restrictions (March 2021) - Governor Ducey lifted many restrictions on businesses, including capacity limits and mask mandates. However, the residual impacts such as reduced customer base or continued caution in consumer behavior could still justify ERTC claims for affected periods.

Throughout 2020 and 2021, Governor Ducey's administration navigated the delicate balance between public health and economic activity. For businesses preparing for an Employee Retention Tax Credit Audit in Arizona, it is vital to document how each order directly impacted operations. Detailed records should include the timeline of restrictions, specific operational limitations imposed, financial impacts, and efforts to retain employees under challenging conditions. These detailed accounts will be critical in demonstrating the pandemic's impact on business operations and justifying the retention credit claims during ERTC audits.

Impact of COVID-19 on Arizona's Economy

The COVID-19 pandemic brought unique challenges to different regions of Arizona, each with distinct economic backbones that faced varied disruptions. Phoenix, Sedona, and Yuma—three cities pivotal to Arizona’s economy—experienced these impacts firsthand. The documentation of these effects is essential for businesses in these areas, particularly in establishing eligibility for the Employee Retention Tax Credit (ERTC) and preparing for potential IRS audits.

  • Phoenix, known for its burgeoning tech and real estate sectors, experienced significant upheavals during the pandemic. As companies rapidly transitioned to remote work setups, the office real estate market saw an abrupt decline in demand. The bustling office complexes and corporate parks of Phoenix, which had thrived on the daily influx of professionals, suddenly found themselves eerily quiet, leading to a downturn in rental income for property owners and a cascade of effects on service businesses such as cafes, transport services, and maintenance companies. Moreover, the tech industry, while somewhat resilient due to its ability to operate digitally, still faced challenges such as disruptions in collaboration and project timelines, affecting overall productivity and financial outcomes. Documenting these changes is crucial for businesses seeking ERTC, as they underscore the substantial shifts in operational models and revenue generation strategies forced by the pandemic.
  • Sedona, a city renowned for its scenic landscapes and tourism-driven economy, the situation was starkly different but equally severe. The travel restrictions implemented to curb the spread of the virus dealt a heavy blow to this community. Hotels, tour operators, local artisans, and restaurants saw their primary revenue source—tourists—dwindle as travel came to a near standstill. The timing was particularly detrimental as it coincided with what would normally be peak tourist seasons, further exacerbating the financial strain. For these businesses, the pandemic’s impact went beyond temporary closures; it reshaped their entire operational framework. Establishing ERTC eligibility here involves illustrating how dependent the local economy is on tourism and how dramatically business operations were curtailed by the travel restrictions.
  • Yuma, a key player in America’s agricultural output, the pandemic’s repercussions were felt in the fields and through the supply chains. As a hub for lettuce, citrus, and other crops, Yuma faced disruptions not just in farming operations but also in processing, packaging, and transportation. Changes in consumer demand patterns, disruptions in labor availability due to health concerns, and logistical challenges in getting goods to market created layers of complications that rippled across the local economy. Agricultural businesses had to navigate not only the immediate health risks to their workforce but also the broader market instabilities that threatened their livelihoods. Documenting these impacts is vital for claiming ERTC, highlighting the direct connection between pandemic-related supply chain disruptions and significant operational challenges.

For businesses in Phoenix, Sedona, and Yuma, the narrative of the pandemic is a complex tapestry of economic disruption, resilience, and adaptation. Each city’s story provides essential context for the ERTC audits, underscoring the need to detail not only the financial losses incurred but also the operational hurdles overcome. This comprehensive documentation will prove crucial in justifying the retention of staff and operational shifts necessitated by the pandemic, forming the backbone of successful ERTC claims.Bottom of Form

Common Triggers for ERC Audits in Arizona

The IRS may initiate ERTC audits based on several factors:

  •  Inconsistencies in Application Data: Differences between ERTC claims and other tax or financial information provided by the business.
  • Excessive Claims: Claims that are unusually large compared to industry norms or relative to the size of the business.
  • Random Selection: Routine IRS checks to ensure compliance and verify the accuracy of claims.

Frequent Mistakes in ERTC Claims

Arizona businesses often face specific challenges when applying for the ERTC, including:

  • Eligibility Misunderstandings: Misinterpreting what qualifies as a significant operational disruption or a substantial decline in gross receipts.
  • Inadequate Documentation: Not maintaining sufficient or detailed records to substantiate claims, especially related to payroll and the impact of COVID-19 on operations.
  • Calculation Errors: Incorrectly calculating the eligible wages or the credit amount, which can lead to discrepancies during IRS reviews.

 

Essential Documentation for ERTC Audit Defense

To effectively defend against an ERTC audit, Arizona businesses should prepare:

  • Detailed Employment Records: Documentation showing continued employment and payroll expenses.
  • Financial Statements: Records that clearly link declines in business revenue to the pandemic.
  • Compliance with Government Orders: Evidence that the business followed federal and state health guidelines affecting their operations.

The Role of Tax Attorneys in ERTC Audit Processes

Tax attorneys are invaluable for navigating the complexities of ERTC audits in Arizona by providing:

  • Expert Guidance on Tax Law: Helping businesses understand and apply the intricate details of ERTC regulations.
  • Preparation for IRS Audits: Assisting in organizing and reviewing documents to ensure they are comprehensive and support the claim.
  • Representation During Audits: Acting on behalf of the business to address any queries or issues raised by the IRS effectively.

Proactive Audit Preparation Strategies

To minimize the risk of audits and prepare effectively, Arizona businesses can adopt several strategies:

  • Regular Review of Documentation: Ensuring all ERTC-related records are accurate and up-to-date.
  • Ongoing Legal Consultation: Staying informed about legislative changes affecting the ERTC through continuous engagement with tax professionals.
  • Mock Audit Drills: Conducting practice audits to identify any potential weaknesses in the documentation or claim process.
  • Cultivating a Culture of Compliance: Developing a corporate culture that emphasizes compliance can significantly aid Arizona businesses in managing ERTC audits. This includes training employees on the importance of maintaining accurate financial and employment records, regularly updating internal policies to comply with changing tax laws, and implementing strong internal controls to oversee all financial operations.

Conclusion: Ensuring Continued ERTC Benefits in Arizona

For businesses across Arizona, effectively managing ERTC claims involves more than just understanding the tax credit. It requires strategic planning, meticulous documentation, and proactive measures to prepare for IRS scrutiny. By leveraging legal expertise and adhering to a robust compliance framework, Arizona businesses can confidently navigate ERTC audits and ensure they continue to benefit from this critical financial support.

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Last updated: May 18, 2024

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