Brotman Law May 4, 2024 13 min read

Employee Retention Tax Credit Audit Risks For Seattle Businesses

How Seattle Businesses Can Protect Themselves From IRS ERTC Audit Enforcement

Navigating the complexities of tax credits can be a daunting task for any business.

For Seattle businesses, the Employee Retention Tax Credit (ERTC) offers a lifeline during the COVID-19 pandemic.

However, claiming this credit comes with its own set of challenges. One of these is the risk of an audit by the Internal Revenue Service (IRS).

This article aims to shed light on the potential risks associated with ERTC audits. It provides guidance on how to prepare for and defend against such audits.

Whether you're a business owner, a financial officer, or a tax advisor, this information is crucial.

Stay informed and prepared to navigate the ERTC audit landscape with confidence.

COVID-19 Orders in Seattle That Impacted Employee Retention Tax Credit Eligibility

While not an exhaustive list, here are COVID-19 orders issued by the Mayor of Seattle that impacted businesses during 2020 and 2021:

1. Moratorium on Small Business Evictions (March 17, 2020) - Mayor Jenny Durkan issued an emergency order to temporarily halt the eviction of small businesses and nonprofit organizations, aiming to alleviate the financial burden caused by closures and slowdowns.

2. Small Business Recovery Task Force (March 2020) - Establishment of a task force focused on the recovery of small businesses. This group worked to develop strategies to support the local economy and ensure the survival of Seattle's diverse business landscape during the pandemic.

3. Seattle's Stabilization Fund (March 2020) - Introduction of a $2.5 million stabilization fund to provide immediate financial grants to small businesses affected by COVID-19, targeting those in most need like those owned by economically disadvantaged communities.

4. Deferred B&O Taxes for Small Businesses (April 2020) - Mayor Durkan deferred the collection of business and occupation (B&O) taxes to help alleviate the financial stress on small businesses, improving their cash flow during critical times.

5. Free Street Use Permits (May 2020) - Seattle provided free street use permits allowing restaurants, retail stores, and other businesses to operate in outdoor settings, which helped them adapt to new social distancing rules while continuing to serve customers.

6. Restaurant and Venue Relief (August 2020) - Additional relief measures for food service and entertainment venues were introduced, recognizing these sectors' significant impact from ongoing restrictions and reduced consumer attendance.

7. Utility Discount Program Expansion (September 2020) - Expansion of the Utility Discount Program to offer relief from utility costs for more businesses struggling with reduced operation hours and lower customer traffic.

8. Winter Preparedness (October 2020) - Funding for winterization of business spaces, including support for HVAC upgrades and outdoor heating solutions, enabling businesses to serve customers safely during the colder months.

9. Reopening Toolkit for Businesses (June 2021)- The city released a comprehensive reopening toolkit to assist businesses in navigating new regulations and safety protocols as state-wide restrictions began to lift, ensuring a safe and efficient resumption of activities.

10. Seattle Rescue Plan (June 2021) - Implementation of the Seattle Rescue Plan, a $128 million package aimed at supporting the city's economic recovery, with significant portions earmarked for direct aid to businesses, including additional grants and continued eviction protections.

These measures reflect the city's proactive approach to supporting and sustaining the local business ecosystem during an unprecedented economic challenge brought about by the COVID-19 pandemic.

Understanding the Employee Retention Tax Credit (ERTC)

The Employee Retention Tax Credit (ERTC) is a relief measure introduced by the U.S. government. It aims to help businesses affected by the COVID-19 pandemic.

The ERTC provides a tax credit for eligible businesses that retain their employees during this challenging period. Understanding the eligibility criteria and how to claim this credit is crucial for Seattle businesses.

Why Seattle Businesses Are at Audit Risk

Seattle businesses that claim the ERTC may face audits from the Internal Revenue Service (IRS). The IRS conducts these audits to ensure compliance with the ERTC guidelines.

The financial impact of an audit can be significant. Therefore, it's essential for businesses to understand the audit risks and prepare accordingly.

Common Triggers of ERTC Audits

There are several reasons why the IRS may audit a business that has claimed the ERTC. These audits are typically triggered by inconsistencies or errors in the ERTC claim.

Here are some common triggers for ERTC audits:

  • Incorrect calculation of the ERTC
  • Inadequate documentation to support the ERTC claim
  • Discrepancies between the ERTC claim and other tax filings
  • Failure to meet the eligibility criteria for the ERTC

Understanding these triggers can help businesses minimize their audit risk.

Preparing Your Business for an ERTC Audit

Preparation is key when it comes to minimizing the risk of an ERTC audit. Businesses should have a clear understanding of the ERTC eligibility criteria and calculation methods. They should also maintain accurate and comprehensive records to support their ERTC claim.

Here are some steps businesses can take to prepare for an ERTC audit:

  • Regularly review and update payroll records
  • Ensure accurate calculation of the ERTC according to IRS guidelines
  • Maintain a timeline of COVID-19-related business disruptions
  • Keep abreast of legislative changes that may affect ERTC eligibility and audit risk

By taking these steps, businesses can not only reduce their audit risk but also ensure they are maximizing their ERTC benefits.

Key Documentation to Maintain for ERTC Claims

Maintaining proper documentation is crucial for substantiating ERTC claims. This includes payroll records, business disruption timelines, and records of qualified wages and health plan expenses.

Here are some key documents businesses should keep:

  • Payroll records showing the calculation of qualified wages
  • Documentation of business disruptions due to COVID-19
  • Records of qualified health plan expenses
  • Any correspondence with the IRS related to the ERTC

By keeping these records, businesses can provide the necessary evidence to support their ERTC claims during an audit.

The Audit Process: What Seattle Businesses Can Expect

The ERTC audit process can be complex and time-consuming. It typically begins with an IRS notice informing the business of the audit.

The IRS will then request specific documents to verify the ERTC claim. This may include payroll records, proof of business disruptions, and records of qualified wages and health plan expenses. The audit may also involve interviews with business owners or employees. It's crucial for Seattle businesses to understand this process and be prepared for it.

Responding to an IRS Audit Notice

When a Seattle business receives an IRS audit notice, it's important to respond promptly and professionally. The notice will specify the information needed and the deadline for response.

It's advisable to consult with a tax advisor or attorney before responding. They can help ensure that the response is accurate and complete, and that it effectively addresses the IRS's concerns. This can significantly improve the chances of a successful audit outcome.

Potential Consequences of an ERTC Audit Failure

If a Seattle business fails an ERTC audit, the consequences can be severe. The IRS may disallow the claimed tax credit, leading to a significant financial impact. The business may also be required to pay penalties and interest on the disallowed amount.

In addition, a failed audit can lead to increased scrutiny from the IRS in the future. This could result in more audits and a higher level of compliance requirements. Therefore, it's crucial for businesses to take ERTC audits seriously and to prepare thoroughly.

Leveraging Seattle ERC Audit Defense Strategies

Seattle businesses can leverage several strategies to defend against ERTC audits. One key strategy is to engage the services of a professional tax advisor or attorney. These professionals can provide expert guidance on ERTC compliance and can help businesses prepare for and navigate the audit process.

Another strategy is to conduct internal reviews or audits to ensure ERTC compliance. This proactive approach can help businesses identify and address potential issues before an IRS audit. It's also important for businesses to stay informed about local and federal tax credit developments, as these can impact ERTC eligibility and audit risk.

Conclusion: Staying Informed and Prepared

In conclusion, Seattle businesses must stay informed and prepared to mitigate the risks associated with ERTC audits. This includes understanding the ERTC provisions, maintaining accurate records, and seeking professional advice when necessary.

By staying abreast of IRS notices and guidance, businesses can ensure they are in compliance with ERTC requirements. Proactive planning and consultation with experts can also help businesses anticipate potential audit issues and develop effective defense strategies. Ultimately, the key to successfully navigating an ERTC audit lies in thorough preparation and a deep understanding of the ERTC rules and regulations.

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Last updated: May 18, 2024

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