Brotman Law May 12, 2024 19 min read

Florida Employee Retention Tax Credit Audit Defense Strategies

How Florida Businesses Can Protect Themselves From an ERTC Audit

In Florida, where the economy thrives on a diverse mix of industries including tourism in Orlando, agriculture in the central region, and international trade in Miami, the Employee Retention Tax Credit (ERTC) has provided critical support during the economic disruptions caused by the COVID-19 pandemic. This federal initiative aids businesses that have maintained their workforces despite experiencing financial challenges. However, accessing the ERTC also opens businesses up to potential IRS audits. For Florida companies, understanding the complexities of ERTC compliance is essential to maximize the benefits of the program and effectively manage potential audits.

This guide will provide strategies for ERTC audit defense tailored to Florida's unique economic landscape, emphasizing the importance of meticulous preparation and the role of specialized legal expertise.

Understanding the ERTC in Florida’s Business Environment

The ERTC offers a refundable tax credit to employers who retained employees during significant declines in gross receipts or full or partial suspensions of their operations due to government-mandated COVID-19 restrictions. For businesses across Florida, particularly those in sectors directly impacted by such disruptions, accurately documenting these impacts is crucial for establishing ERTC eligibility and preparing for potential IRS audits.

Florida Statewide Orders That May Have Impacted Their Business

In Florida, here are some of the significant COVID-19 orders during 2020 and 2021 under Governor Ron DeSantis, and how these directives impacted businesses, particularly in relation to the Employee Retention Tax Credit (ERTC) Audit.

  • State of Emergency Declaration (March 2020)- Governor Ron DeSantis declared a state of emergency, which enabled the mobilization of state resources and set the regulatory framework for subsequent business-related restrictions. This foundational step was crucial for businesses to begin assessing operational disruptions for ERTC eligibility.
  • Stay-at-Home Order (April 2020) - This order mandated residents to stay home except for essential activities. Non-essential businesses were required to close or significantly reduce operations, which directly supports ERTC claims as these businesses faced government-mandated suspensions.
  • Closure of Non-Essential Businesses (April 2020) - Specific sectors such as entertainment and some retail were temporarily shut down, significantly affecting their operations and revenue. This direct interruption is essential for substantiating ERTC eligibility.
  • Phase 1 Reopening (May 2020) - Initiated a phased reopening, allowing businesses like restaurants and retail stores to operate at limited capacity. Despite reopening, the capacity restrictions continued to impact businesses' functionality and profitability, relevant for ERTC due to partial suspension of normal operations.

  • Mandatory Mask Mandates (Varied by County, mid-2020) - While not a statewide mandate, several Florida counties required masks in public spaces, which added operational challenges for businesses to enforce these rules and manage public compliance, impacting customer interactions and potentially affecting revenues.

  • Ban on Large Gatherings (Ongoing from 2020) - With restrictions on the size of public gatherings, venues and businesses relying on event-based revenue continued to face operational limitations, reinforcing their claims for the ERTC due to restricted operational capacity and direct revenue impacts.

  • Extension of State of Emergency (Multiple extensions across 2020 and 2021) - These extensions underscored the ongoing economic impact of the pandemic, reinforcing the need for continued documentation of business disruptions for ERTC eligibility.

  • Lifting of Statewide Restrictions (September 2020) - Governor DeSantis moved to lift many of the statewide restrictions, pushing for a return to normalcy. However, many businesses continued to face challenges in returning to pre-pandemic levels of operation and profitability, making ongoing ERTC claims relevant.

  • Vaccination Rollout and Business Operations (2021) - As vaccines became available, businesses faced new challenges in adapting operations to accommodate vaccinated and unvaccinated employees and customers, impacting operational norms and ERTC eligibility.

  • Emergency Bridge Loan Program (2020) - The state introduced a bridge loan program for small businesses impacted by COVID-19, which provided immediate financial assistance. Participation in such programs highlights the financial distress experienced by businesses, supporting their documentation for ERTC claims by illustrating the need for additional support to retain employees.

Throughout the pandemic, Governor Ron DeSantis’s administration took various measures to mitigate the spread of COVID-19 while trying to manage its economic impact.

For Florida businesses preparing for an Employee Retention Tax Credit Audit, it is essential to document how each state order affected their operations, financial health, and employment practices. Detailed records should include the timing of government orders, descriptions of how these orders influenced operational capacities, financial impacts, and efforts to retain employees under challenging conditions. This comprehensive documentation will be key to demonstrating the necessity of the ERTC during periods of significant operational disruption and recovery.

Impact of COVID-19 on Florida's Local Economy

The COVID-19 pandemic profoundly impacted Florida's diverse economic landscape, notably affecting the bustling tourism sectors in Orlando, the agricultural strongholds producing citrus and other crops, and the vibrant trade and real estate markets in Miami. Each sector faced unique challenges, underlining the importance of accurate documentation for financial support measures such as the Employee Retention Tax Credit (ERTC) and for IRS audits.

  • Orlando and the Greater Tourism Industry's Struggles: Orlando, a global hub for tourism and entertainment with its theme parks and extensive hospitality services, experienced severe disruptions. The imposition of travel restrictions and the widespread cancellation of events led to unprecedented losses. Hotels, restaurants, theme parks, and entertainment venues saw a dramatic decline in visitor numbers. The ripple effects were felt across the local economy, impacting everything from local retail to services that depend on tourist spending. Businesses had to navigate this new reality by implementing stringent health measures, adapting services to meet safety guidelines, or shifting to virtual engagement models where possible. Documenting these adaptations, along with detailed records of lost revenue and the measures taken to retain employees despite reduced operations, is crucial. This data not only supports claims for the ERTC by highlighting sustained efforts to mitigate financial distress but also prepares businesses for potential IRS audits by clearly delineating the impact of COVID-19.
  • Challenges in Florida's Agriculture: Florida's agriculture sector, particularly citrus producers and other crop cultivators, faced significant hurdles due to distribution challenges and volatile market conditions. As logistics networks worldwide were disrupted, farmers encountered difficulties in transporting produce to markets, leading to increased costs and sometimes even spoilage of goods. Additionally, fluctuations in demand—particularly from large buyers like restaurants and schools temporarily closed or operating at reduced capacity—complicated market dynamics. For agricultural businesses, maintaining detailed documentation of how these challenges affected their operations is essential. Records should include changes in market demand, logistical issues, additional costs incurred, and strategies deployed to maintain workforce stability and production continuity, strengthening their position for ERTC eligibility.
  • Miami’s Trade and Real Estate Disruptions: In Miami, known for its critical role in international trade and a booming real estate sector, the pandemic caused considerable disruptions. Trade barriers and global economic slowdowns led to reduced commerce activity, affecting businesses dependent on international markets. Simultaneously, the real estate sector had to adapt to rapid shifts in market demand. The commercial real estate market, in particular, faced challenges as businesses reduced office space usage in favor of remote working, while residential real estate saw varying trends with increased demand in some areas but stark declines in others. For businesses in Miami, documenting these sector-specific impacts is vital. This includes detailing disruptions in trade, changes in real estate demand, and the overall financial impact on operations. Such documentation is critical not only for assessing the direct impact of the pandemic but also for substantiating ERTC claims and preparing for IRS audits.

For all sectors across Florida, accurately documenting the economic impacts of the pandemic is not just about capturing financial losses but about detailing the operational challenges and strategic responses. This comprehensive approach ensures that businesses can effectively substantiate their ERTC eligibility, providing a clear basis for financial relief and readiness for detailed reviews by tax authorities. 

The Role Tax Attorneys Play in Protecting Florida Businesses From IRS Enforcement

Tax attorneys play a crucial role in helping Florida businesses navigate the complexities of Employee Retention Tax Credit (ERTC) audits. Their expertise is particularly valuable in understanding the intricate tax laws and ensuring that businesses not only comply with the relevant regulations but also optimize their claims without risking non-compliance. 

When a business claims the ERTC, it must meet specific criteria that often involve detailed interpretations of disruptions to business operations and a substantial decline in gross receipts. Tax attorneys can provide critical guidance in interpreting these criteria. They help businesses understand what qualifies as a significant disruption and how to accurately calculate the decline in gross receipts. This is vital because inaccuracies in these areas are common triggers for audits. By ensuring that a business's claim is both justified and well-documented, tax attorneys can significantly reduce the likelihood of an IRS audit.

Documentation is a key aspect of defending against ERTC audits. Tax attorneys assist businesses in maintaining precise records that support their claims. This involves not only guiding the initial documentation of qualifying events and financial impacts but also advising on the ongoing documentation necessary to support the claim throughout the audit process. Tax attorneys will scrutinize employment records, financial statements, and compliance documents to ensure they accurately reflect the narrative presented in the ERTC claim. This meticulous documentation proves essential during audits, as it provides clear evidence to counter any IRS challenges to the claim.

Calculation errors are another common issue that can lead to ERTC audits. The process of calculating the credit involves complex payroll data and requires a thorough understanding of IRS guidelines. Tax attorneys work closely with accountants to ensure that the calculations are correct and substantiated by solid evidence. They can spot potential errors in payroll calculations and advise on corrections before the submission, thereby minimizing red flags that might catch the attention of the IRS.

Moreover, tax attorneys are instrumental during the audit process itself. They can represent the business in communications with the IRS, advocating on the business's behalf and negotiating when necessary. Their understanding of tax law and IRS procedures enables them to effectively argue the legitimacy of the ERTC claim, address any issues the IRS raises, and clarify misunderstandings or disputes. This representation is invaluable in preventing the audit from resulting in adverse outcomes such as the denial of the credit or the imposition of penalties.

Tax attorneys also aid Florida businesses in proactively preparing for potential audits. They can conduct mock audits to identify vulnerabilities in the ERTC claim process and suggest improvements. These practice runs prepare businesses for the actual audit process, making them less daunting and more manageable. Furthermore, tax attorneys advise on developing internal protocols and training programs that enhance compliance and governance. By fostering a culture of compliance, businesses can ensure that their ERTC claims are not only prepared more accurately but also defended more robustly.

In addition to their direct roles in audit defense, tax attorneys provide ongoing education and updates on changes in tax laws and IRS policies regarding the ERTC. This ensures that businesses remain informed of new developments that could impact their claims, helping them to stay compliant with evolving regulations and to anticipate potential audit triggers.

Overall, the involvement of tax attorneys is pivotal for Florida businesses in safeguarding their interests when claiming the ERTC. Their expertise not only helps prevent audits by ensuring compliance and accuracy from the outset but also provides a strong defense should an audit occur, thereby protecting the business from potential financial repercussions.

 

 

 

 

 

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-Aileen Dwight, Licensed Clinical Social Worker & Psychotherapist

Last updated: May 18, 2024

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