Brotman Law June 27, 2024 20 min read

ERTC Compliance: A Step-by-Step Guide to Audit Defense for Georgia Businesses

How Georgia Businesses Can Best Prepare for ERTC Audits

In Georgia, where the economy is powered by diverse sectors including film production in Atlanta, automotive manufacturing in the Columbus area, and extensive agricultural activities in rural regions, the Employee Retention Tax Credit (ERTC) has been a crucial financial support during the economic challenges caused by the COVID-19 pandemic. This federal program aids businesses that have sustained their workforce despite facing significant operational and financial difficulties. However, receiving the ERTC also subjects businesses to potential IRS audits. For Georgia companies, a deep understanding of ERTC compliance is crucial to maximizing the benefits of the program and managing potential audits effectively.

This guide will provide strategies for ERTC audit defense tailored to the economic backdrop of Georgia, highlighting the importance of thorough preparation and the role of professional legal advice.

Understanding the ERTC in Georgia’s Business Landscape

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

Georgia’s Statewide Orders That May Have Impacted Their Business

Here's a detailed summary of ten significant COVID-19 orders issued in Georgia during 2020 and 2021 under Governor Brian Kemp, and how these directives impacted businesses, particularly in relation to the Employee Retention Tax Credit (ERTC) Audit.

  • Public Health State of Emergency (March 2020) - Governor Brian Kemp declared a public health state of emergency, which facilitated a coordinated state response to the pandemic. This declaration allowed for mobilization of resources and regulatory flexibility, critical for businesses assessing disruptions for ERTC eligibility.

  • Shelter-in-Place Order (April 2020) - This order required Georgians to stay at home unless performing essential activities, leading to temporary closures or severe operational restrictions for non-essential businesses. The direct cessation of operations supports businesses’ claims for the ERTC as operations were either suspended or severely limited.

  • Closure of Non-Essential Businesses (April 2020) - Specific sectors, particularly those involving close personal contact such as dine-in restaurants, theaters, and personal care services, were required to close temporarily. This mandated closure is a qualifying factor for the ERTC by causing a suspension of business activities.

  • Gradual Reopening (April 2020) - Georgia was one of the first states to initiate a phased reopening, allowing certain businesses like gyms, barber shops, and later restaurants to reopen with strict safety protocols. Despite reopening, these businesses faced capacity restrictions and operational challenges, supporting ERTC eligibility due to partial suspension of normal operations.

  • Mandatory Mask Requirements (Varied by Municipality, mid-2020) - While not a statewide mandate initially, several local municipalities in Georgia required masks in public spaces, which added operational challenges for businesses to enforce compliance and manage public interactions, impacting customer behavior and potentially affecting revenues.

  • Extension of Public Health Emergency (Multiple times in 2020 and 2021) - The continued extensions of the public health emergency underscored the ongoing economic impact of the pandemic, reinforcing the need for ongoing documentation of business disruptions for ERTC eligibility.

  • Ban on Large Gatherings (2020-2021) - Restrictions on large gatherings continued to affect businesses dependent on large-scale events and venues, reinforcing their claims for the ERTC due to limited operational capacity and direct impacts on revenue.

  • Safety Guidelines for Businesses (Ongoing) - Governor Kemp issued detailed safety guidelines for businesses to follow as they remained open or reopened, necessitating additional investments in health and safety measures, which impacted operational costs and strategies.

  • Expansion of Business Support Measures (2020-2021) - The state introduced several measures to support businesses financially, including grants and loans. Participation in these programs can support ERTC documentation by illustrating the financial distress businesses experienced.

  • Vaccination Rollout and Impact on Business Operations (2021) - The rollout of COVID-19 vaccines led to adjustments in business operations, affecting how businesses planned their staffing and adapted their operations to meet evolving safety guidelines, relevant to sustaining employment and ERTC eligibility.

Throughout the pandemic, Governor Brian Kemp’s administration in Georgia implemented various measures to mitigate the spread of COVID-19 while trying to balance economic impacts. For Georgia businesses preparing for an Employee Retention Tax Credit Audit, it is crucial 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 Georgia's Economy

The COVID-19 pandemic brought significant challenges to Georgia, particularly affecting key economic centers and industries. From Atlanta's film and corporate sectors to the manufacturing hubs in Columbus and the agricultural heartlands, the disruption was widespread. Each region faced unique setbacks, requiring strategic responses and meticulous documentation essential for substantiating Employee Retention Tax Credit (ERTC) eligibility and preparing for potential IRS audits.

  • Disruptions in Atlanta's Film and Corporate Sectors: Atlanta, a burgeoning hub for film and television production as well as numerous corporate headquarters, faced substantial disruptions. The film industry, which relies heavily on close physical interaction, was hit hard by social distancing requirements and temporary shutdowns. Major productions were halted or postponed, leading to significant financial losses and widespread job layoffs. Similarly, corporations in Atlanta had to quickly pivot to remote work configurations, disrupting normal business operations and creating challenges in communication, project management, and productivity. For businesses in Atlanta, documenting these changes is crucial. Detailed records of production delays, changes in operational procedures, and financial impacts such as loss of revenue and additional costs incurred due to new health guidelines are critical. This documentation is essential not only for operational assessments but also for validating claims for the ERTC by showing how significantly the pandemic affected business operations.
  • Columbus and Surrounding Areas: Manufacturing and Automotive Sector Setbacks: In Columbus and its surrounding areas, known for their robust automotive and manufacturing sectors, the pandemic caused production halts and severe supply chain interruptions. Factories faced closures or operated at reduced capacity to comply with health regulations, significantly impacting output and profitability. The supply chain issues were compounded by global disruptions, which affected the delivery of parts and raw materials, further straining production schedules and financial stability. Manufacturers had to navigate these operational hurdles while attempting to maintain workforce and manage costs. For these businesses, maintaining comprehensive records of production stoppages, supply chain issues, and financial losses is vital. Such documentation supports ERTC claims by detailing the extent of operational disruptions and the efforts made to retain employees under challenging circumstances.
  • Vidalia: Challenges in Georgia's Agricultural Regions.  Georgia's agricultural sectors were not spared by the pandemic's impact. Farmers throughout the state contended with disrupted supply chains and fluctuating market demands. The closure of many restaurants and the alteration in consumer purchasing patterns led to an unpredictable market, affecting both crop sales and revenue streams. Additionally, logistical challenges in transporting goods to markets further complicated operations. For agricultural businesses, it is imperative to document these disruptions comprehensively. Records should include details on changes in market demand, logistical difficulties, and financial impacts. Accurate documentation of these factors is crucial for substantiating ERTC eligibility as it demonstrates the direct effects of the pandemic on agricultural operations and the necessity to maintain employment levels despite adverse conditions.
  • Savannah: Tourism and Event-Based Economy. Savannah, known for its historic districts and vibrant tourism sector, faced severe disruptions. The city's numerous festivals, tours, and events were canceled or severely restricted. Hotels, tour operators, and restaurants, which usually thrive on the influx of tourists, saw dramatic declines in revenue. Businesses need to document the specific periods of shutdown, the cancellation of major events (like the Savannah Music Festival), changes in operational strategies (such as pivoting to local tourism or virtual tours), and how they attempted to retain employees during these downturns.
  • Augusta: Healthcare and Golf Tourism. In Augusta, best known for hosting The Masters golf tournament, the postponement of the event and restrictions on other golf-related activities had a significant economic impact. Additionally, as a regional healthcare hub, local medical facilities faced increased costs and operational changes in response to COVID-19, affecting related businesses from medical suppliers to catering services. Documentation for ERTC should include details on event postponements, lost tourism revenue, healthcare operational impacts, and strategies for maintaining employment levels.
  • Macon: Arts, Culture, and Educational Services. Macon, with a strong emphasis on cultural and educational institutions, saw significant impacts when universities and cultural institutions like museums and theaters closed or operated at reduced capacity. This affected not only the institutions themselves but also businesses that cater to student populations and event-goers, such as restaurants and retail stores. For ERTC claims, businesses should detail the closure of educational institutions, cancellation of cultural events, shifts to virtual platforms, and the impact on employment.
  • Albany: Agribusiness and Manufacturing Disruptions. Albany, an important center for agribusiness and manufacturing in southwest Georgia, experienced disruptions in these sectors due to supply chain issues and reduced workforce capacities from social distancing requirements. This led to temporary closures and slowed production rates. Agribusinesses and manufacturers should document these disruptions, including specific data on reduced output, financial losses, and efforts to adapt operations and retain workers.
  • Athens: College Town Economy. Athens, home to the University of Georgia, faced challenges with the reduction of in-person classes and student activities. This led to a decrease in demand for businesses reliant on the college population, including housing, food services, and entertainment. Businesses in Athens need to maintain records of reduced demand, shifts to alternative service models (like takeout and delivery for restaurants), and employee retention efforts during the pandemic.

For businesses across these regions in Georgia, the narrative of navigating through the pandemic is marked by resilience and adaptation. Accurate documentation of economic impacts and operational changes is crucial not just for historical record-keeping but also for accessing vital financial support mechanisms like the ERTC. This comprehensive approach ensures that businesses can effectively demonstrate to the IRS the full extent of the pandemic's impact and justify their need for financial relief to sustain operations and retain essential staff.

Common Triggers for IRS Audits in Georgia

Businesses in Georgia might face IRS audits due to:

  • Inconsistencies in Financial Reporting: Differences between the information provided in ERTC claims and other financial or employment records can raise red flags.
  • Excessive Claims: Large claims that appear disproportionate to the business's operational impact or size may trigger scrutiny.
  • Random Selection: As part of routine checks, the IRS may select businesses randomly to ensure compliance and verify the accuracy of claims.

Avoiding Common Mistakes in ERTC Claims

When applying for the ERTC, Georgia businesses often encounter several pitfalls:

  • Misinterpreting Eligibility Criteria: Incorrectly determining what qualifies as significant operational disruption or substantial decline in gross receipts.
  • Poor Documentation: Failing to maintain detailed records that link operational changes and financial outcomes directly to the pandemic.
  • Errors in Calculation: Miscalculating the eligible amount due to misunderstandings of IRS guidelines or payroll complexities.

Key Documentation for ERTC Audit Defense

Building a strong defense against an ERTC audit involves comprehensive documentation:

  • Detailed Employment Records: Demonstrating the continuity of employment and payroll expenses throughout the affected periods.
  • Financial Statements: Clearly showing revenue declines correlated with pandemic-related disruptions.
  • Regulatory Compliance Documents: Providing evidence of compliance with federal and state COVID-19 regulations that impacted business operations

Role of Tax Attorneys in ERTC Audit Defense

In Georgia, tax attorneys are crucial for effectively navigating the complexities of ERTC audits by providing:

  • Expert Legal Guidance: Offering interpretations of complex tax laws and advising on their application to specific business scenarios.
  • Audit Preparation: Assisting in organizing and reviewing documentation to ensure it robustly supports the ERTC claim.
  • Representation During Audits: Handling communications with the IRS to ensure that the business’s interests are effectively represented.

Proactive Audit Preparation Strategies

To minimize the risk of audits and ensure preparedness, Georgia businesses should adopt several proactive measures:

  • Regular Documentation Review: Ensuring all documents related to the ERTC are accurate and complete.
  • Continuous Legal and Financial Consultation: Staying updated on changes to ERTC regulations and IRS auditing practices through regular consultations with tax professionals.
  • Mock Audits: Conducting internal or third-party audits to identify and address potential issues before they are flagged by the IRS.

Cultivating a Compliance-Focused Corporate Culture

Developing a corporate culture that emphasizes compliance can significantly aid in managing ERTC audits. This involves training employees on the importance of precise record-keeping, regularly updating compliance protocols, and implementing strong internal controls over financial management.

Conclusion: Securing Continued Benefits from the ERTC in Georgia

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

"Sam is a wonderful, results-oriented and extremely knowledgeable and talented attorney, who really has 'heart' in working on behalf of his clients, and explains options in a straightforward, respectful manner. He has assisted us with great outcomes which have added to our quality of life. I would not hesitate to recommend Sam for his services as he is an ethical, personable and expert attorney in his field. You will likely not be disappointed with Sam's work ethic, approach and his efforts."

-Aileen Dwight, Licensed Clinical Social Worker & Psychotherapist

Last updated: July 10, 2024

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