Brotman Law May 19, 2024 23 min read

Colorado ERTC Audit Defense: A Guide for Local Businesses

Mastering Employee Retention Tax Credit Audit Defense in Colorado

In Colorado, where the economy is supported by a mix of industries including technology in Denver, tourism in Colorado Springs, and agriculture in the Eastern Plains, the Employee Retention Tax Credit (ERTC) has been a critical financial aid during the COVID-19 pandemic. This federal initiative helps businesses that managed to retain their workforce amid economic uncertainty. While the ERTC offers significant financial relief, it also subjects recipients to the possibility of IRS audits. Understanding the nuances of ERTC compliance is crucial for Colorado businesses to ensure they continue benefiting from the program and effectively handle any audits.

This guide will provide detailed strategies for ERTC audit defense tailored to the varied economic landscape of Colorado, emphasizing the importance of diligent preparation and the essential role of legal expertise.

Understanding the ERTC’s Impact on Colorado’s Industries

The ERTC allows businesses that experienced a significant decline in gross receipts or were subject to full or partial suspensions due to governmental COVID-related orders to claim a refundable tax credit. It’s essential for businesses across Colorado’s key sectors to understand how these criteria apply to their operations

Colorado Statewide Orders That May Have Impacted Their Business

Below is a summary of ten significant COVID-19 orders issued in Colorado during 2020 and 2021, under Governor Jared Polis, which had notable impacts on businesses. This detailed summary is tailored to illustrate how these impacts are relevant to the Employee Retention Tax Credit (ERTC) Audit.

  • State of Emergency Declaration (March 2020) - Governor Jared Polis declared a state of emergency, setting the stage for stringent public health measures. This initial step is critical for ERTC claims as it marks the official response to the pandemic, affecting all subsequent business operations and justifying disruptions.
  • Closure of Non-Essential Businesses (March 2020) - A sweeping order closed non-essential businesses temporarily, directly affecting their ability to operate. This government-mandated closure is a primary qualifier for ERTC, as it forced businesses to suspend most, if not all, operations.
  • Stay-at-Home Order (March 2020) - This order required residents to stay at home except for essential needs, drastically reducing customer traffic and impacting businesses’ ability to generate revenue. Such restrictions support ERTC claims by demonstrating a government-imposed reduction in business capacity.
  • Mandatory Mask Mandate (July 2020)- Implementing a statewide mask mandate added new operational challenges and costs for businesses required to enforce compliance. These costs and disruptions can be factored into ERTC calculations as additional burdens imposed on businesses.
  • Gradual Reopening with Restrictions (May 2020) - Colorado implemented a phased approach to reopening, allowing businesses to operate under strict health guidelines and capacity limits. Although reopening, the continued restrictions supported ERTC eligibility due to partial suspension of normal operations.
  • Extended Unemployment Benefits (Throughout 2020) - The extension of unemployment benefits impacted businesses’ ability to recall workers, affecting operational capacity and stability. This context is relevant for ERTC, highlighting struggles to maintain employment levels despite ongoing economic disruptions.
  • Ban on Large Public Gatherings (March 2020, and updated periodically) - Restrictions on the size of public gatherings affected venues, event organizers, and businesses reliant on event-based revenue, qualifying them for ERTC by showing direct impacts on their business model and revenue streams.
  • Support Measures for Small Businesses (2020-2021) - The state introduced various financial aid programs to assist small businesses, indicating recognition of the severe impacts of COVID-19 on local economies. Participation in these programs can underscore the financial distress necessary for ERTC justification.
  • Temporary Closure and then Restriction of Bars and Restaurants (2020-2021) - Periodic closures and strict operational limits on bars and restaurants directly reduced their operational hours and customer capacity, a clear basis for ERTC claims due to the direct interruption of business operations.
  • Vaccination Rollout and Impact on Business Operations (Starting December 2020) - The beginning of vaccine distribution brought hope but also new challenges in terms of navigating employee health and customer safety regulations. The ongoing adaptation required supports claims for the ERTC by illustrating continued impacts on business operations.

Throughout 2020 and 2021, Governor Jared Polis's administration navigated a delicate balance between safeguarding public health and supporting economic activity in Colorado. For businesses preparing for an Employee Retention Tax Credit Audit, it is essential to document how each of these state orders impacted their operations, financial health, and employment practices. Detailed records should include the timing of government orders, specific limitations on operations, financial impacts, and efforts to retain employees. This detailed documentation will be key to demonstrating the necessity of the ERTC during periods of significant operational disruption and gradual recovery.

Specific Challenges Faced by Colorado Businesses

In response to the COVID-19 pandemic, various regions in Colorado experienced unique economic impacts that significantly influenced local businesses and industries. These impacts were particularly notable in Denver, Colorado Springs, and the Eastern Plains. Understanding and documenting these specific economic challenges is essential for substantiating eligibility for the Employee Retention Tax Credit (ERTC) and preparing for potential IRS audits.

  • Denver: Tech and Startup Community Issues - Denver, renowned for its vibrant tech and startup ecosystem, encountered a profound shift as the pandemic prompted a widespread pivot to remote work. This transition fundamentally altered operational dynamics and affected revenue streams across the sector. Many tech companies, initially dependent on collaborative work environments and face-to-face interactions for innovation and development, had to quickly adapt to remote operations. This shift, while enabling some businesses to continue operations, disrupted normal business processes and led to unexpected costs, such as investments in digital infrastructure and cybersecurity enhancements. For Denver's tech companies, documenting these changes and their impact on revenue and operations is crucial. This information can demonstrate to IRS auditors how the pandemic caused significant operational disruptions, justifying ERTC claims.
  • Denver: Tourism and Convention Industry Setbacks - Denver, a hub for national and international conventions, experienced significant disruptions when major events were canceled due to COVID-19. The city's convention centers, hotels, and local businesses that rely heavily on the influx of conference attendees saw dramatic declines in revenue. Many businesses in the hospitality sector had to switch to alternative services such as virtual events and enhanced local delivery and pickup options for restaurants and cafes. For ERTC claims, Denver businesses should document the cancellation of specific events, changes in operations, and efforts to mitigate the impact on employment.
  • Colorado Springs: Outdoor Recreation and Retail Adjustments - Colorado Springs, known for its vibrant outdoor and tourist activities, faced restrictions that limited visitor access to popular attractions such as Pikes Peak and the Garden of the Gods. Outdoor equipment retailers and tour operators saw reduced sales and operational capacities. Many adapted by enhancing online sales platforms and offering private tours or limited group activities that complied with social distancing regulations. Businesses should keep records of the specific limitations imposed and their direct effects on operations and staffing.
  • Aurora: Healthcare Services Pressure - Aurora, with its large healthcare industry presence including the Anschutz Medical Campus, faced both increased demand in certain healthcare services and significant disruptions due to the re-allocation of resources to COVID-19 care. Non-emergency procedures were delayed or canceled, impacting revenue streams. Healthcare providers can claim the ERTC by documenting disruptions in service provision, payroll details during the pandemic, and how they maintained staffing levels despite changes in service demand.
  • Fort Collins: University Community Impact - Fort Collins, home to Colorado State University, saw a substantial impact when the university transitioned to remote learning. The local economy, which depends significantly on the university population, experienced downturns in sectors such as rental housing, student services, and college-town nightlife. Businesses should document the decline in customer base due to the university's operational shifts, efforts to adjust service offerings (like transitioning to virtual tutoring or remote engagement activities), and strategies employed to retain employees.
  • Lakewood: Small Business Struggles - In Lakewood, small businesses, particularly in sectors like personal services (salons, fitness centers) and small retail shops, faced stringent restrictions that led to temporary closures or severe operational limits. Many businesses pivoted to appointment-only models or online sales, incurring additional costs for setting up websites or purchasing necessary sanitation supplies. Documenting the periods of closure, financial losses, operational shifts, and employee retention efforts will be essential for these businesses when applying for the ERTC.
  • Colorado Springs: Tourism and Military Operations- Colorado Springs, which serves as both a key tourist destination and a center for military operations, saw significant disruptions. The pandemic led to a drastic reduction in tourism, affecting all related industries, including hospitality, dining, and local attractions. Furthermore, the city’s military contracts also experienced interruptions, as non-essential activities and operations were scaled back. Businesses connected to these sectors faced substantial revenue losses and operational challenges. For ERTC purposes, companies in Colorado Springs must detail how the decline in tourism and disruptions in military activities impacted their financial health and operational stability, providing a clear link to the qualifications for the tax credit.
  • Eastern Plains: Agriculture Sector- The agriculture sector in the Eastern Plains faced its own set of challenges due to the pandemic. Disruptions in supply chains and a decrease in demand from commercial buyers, such as restaurants and schools, significantly impacted the region. Farmers and agricultural producers had to navigate the complexities of reduced market access and fluctuating prices while managing the health and safety of their workforce. Documenting these disruptions is vital for agricultural businesses seeking the ERTC, as they need to illustrate how the pandemic directly led to decreased sales and operational inefficiencies.

For businesses across these regions, the narrative of economic disruption during the pandemic is not just about the immediate effects but also about the ongoing challenges in recovery. Accurately documenting these impacts for the ERTC involves detailing the financial losses, changes in operational practices, and efforts to maintain employment despite significant economic strain. This comprehensive approach in the documentation will help businesses in Denver, Colorado Springs, and all over Colorado substantiate their claims during ERTC audits, ensuring they receive necessary support to aid in their recovery and stabilization.

Common Triggers for IRS ERTC Audits in Colorado

The Employee Retention Tax Credit (ERTC) offers a lifeline to businesses impacted by the COVID-19 pandemic by providing significant tax relief for those who managed to retain their employees during this tumultuous period. However, the process of claiming this credit is fraught with complexities that can trip up even the most diligent business owners. Colorado businesses aiming to leverage this tax benefit must navigate these waters carefully to avoid common pitfalls that could lead to an IRS audit. Here’s an insightful look at these challenges and strategic advice on how to address them.

Overlooking ERTC Eligibility Requirements

One of the most significant pitfalls is the misunderstanding or oversight of the ERTC's eligibility requirements. The ERTC is available to businesses that experienced a full or partial suspension of operations due to government-imposed COVID-19 restrictions or a significant decline in gross receipts compared to 2019. For each quarter, businesses need to evaluate their eligibility based on these criteria:

  • Government orders: Businesses often misinterpret what constitutes a "partial suspension" of operations. For instance, if a Colorado restaurant could only serve takeout when it normally offers dine-in services, this could qualify as a partial suspension.
  • Decline in gross receipts: There's also confusion around the calculation of the decline in gross receipts, especially when considering what counts as gross receipts and which quarters to compare.

Failing to Properly Calculate the Employee Retention Tax Credit

Another common error is incorrect calculation of the credit. The ERTC allows businesses to claim a percentage of wages paid to employees during eligible quarters, up to a maximum amount per employee. Mistakes often occur when:

  • Determining qualified wages: Businesses sometimes claim the credit for wages not eligible under the ERTC or fail to exclude wages that were counted for other credits, like the Paycheck Protection Program (PPP).
  • Cap on wages: Misunderstanding the cap on wages that can be claimed per employee per quarter can also lead to overclaiming.

Inadequate Documentation

The IRS requires detailed documentation to support ERTC claims. This documentation includes payroll records, employment tax returns, and records of how government orders impacted operations. Colorado businesses sometimes fail to maintain sufficient records, which can be a significant issue during an audit. Adequate documentation should clearly demonstrate the nexus between business operations, government orders, and employee retention efforts.

Mixing Wages Between Different Programs

A critical area where Colorado businesses stumble is in the intersection of ERTC with other relief programs such as PPP. It's crucial to understand that wages used for PPP loan forgiveness cannot be claimed for the ERTC. Double-dipping is a red flag for the IRS and can lead to adjustments during an audit. Businesses must keep separate records for each program to clearly delineate which wages are claimed under which program.

Delay in Compliance Updates

Tax laws and guidelines around pandemic relief measures have been fluid, with several legislative changes impacting the ERTC. Businesses that do not stay updated on these changes may find themselves out of compliance. Regularly consulting with tax professionals or attending seminars and webinars can help keep business owners informed of the latest compliance requirements.

ERTC Tax Attorney Strategies to Avoid These Pitfalls

Thorough Review of Operations and Receipts: Regularly review your business operations and financial statements to determine eligibility accurately. Assess each quarter independently to decide if your business meets the criteria for that period.

Engage With Tax Professionals: Work with tax attorneys who specialize in tax credits and are updated on the latest IRS guidelines. Their expertise can be invaluable in navigating the complexities of the ERTC.

Maintain Rigorous Record-Keeping: Keep detailed and organized records of all financial transactions, payroll data, and correspondences related to COVID-19. Document how government orders affected your business operations and employee retention strategies.

Separate Tracking for Multiple Relief Efforts: Use separate accounts or tracking codes in your accounting software to manage funds and expenses related to different relief programs, ensuring no overlap in wage claims.

Continuous Learning and Adaptation: Stay engaged with updates from the IRS, tax seminars, and industry groups. This continuous learning will help you adapt to changes in regulations and maintain compliance.

By avoiding these common pitfalls and adopting a proactive approach to compliance and documentation, Colorado businesses can effectively manage their ERTC claims and minimize the risk of an IRS audit. This careful approach not only secures the financial benefits intended by the ERTC but also safeguards the business against potential penalties and disruptions.

Conclusion: Ensuring Long-Term Benefits from the ERTC in Colorado

For Colorado businesses, effectively managing ERTC claims involves more than just meeting eligibility requirements. It requires strategic planning, meticulous documentation, proactive audit defense measures, and the utilization of specialized legal expertise. By adopting these practices, businesses across Colorado can confidently navigate the complexities of ERTC audits and ensure continued financial stability and growth in the state’s diverse economic environment.

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Last updated: June 15, 2024

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