Brotman Law May 13, 2024 21 min read

Illinois ERTC Audit Defense: A How-To Guide

Ways That Illinois Businesses Can Protect Their Employee Retention Tax Credits

In Illinois, where the economy spans from the financial and technological hub of Chicago to the agricultural expanses in central and southern regions, the Employee Retention Tax Credit (ERTC) has been a significant boon during the economic uncertainty caused by the COVID-19 pandemic. This federal initiative provides critical support to businesses that have maintained their workforces amidst financial hardships. However, the ERTC also opens the door to potential IRS audits. For Illinois businesses, a comprehensive understanding of ERTC compliance is crucial to maximize the benefits of the program and effectively manage any audits that may arise.

This guide will detail tailored strategies for ERTC audit defense in Illinois, emphasizing the importance of thorough preparation and the role of specialized legal expertise.

Understanding the ERTC in Illinois’s Economic Landscape

The ERTC offers a refundable tax credit to employers who kept employees on their payroll during periods of significant operational disruptions or declines in gross receipts due to government-mandated COVID-19 restrictions. It's essential for Illinois businesses, particularly those impacted by drastic fluctuations in consumer behavior and supply chain interruptions, to document these impacts meticulously.

Among jurisdictions that were most impacted by Illinois state COVID-19 related orders:

1. Chicago - The largest city in Illinois and the third most populous city in the United States.
2. Aurora - Known as the "City of Lights," it is the second-largest city in the state.
3. Naperville - A suburb of Chicago, known for its excellent public schools and low crime rates.
4. Joliet - Located southwest of Chicago, known for its rich history and as the home of the Chicagoland Speedway.
5. Rockford - Situated in northern Illinois, known for its contributions to manufacturing and as a cultural hub.
6. Springfield - The state capital, located in central Illinois, rich in history, particularly with regards to Abraham Lincoln.
7. Peoria - Known for its manufacturing history and as a major hub along the Illinois River.

Illinois Statewide Orders That May Have Impacted Their Business

 

  • State of Emergency Declaration (March 2020) - Governor J.B. Pritzker declared a state of emergency, initiating statewide responses to the pandemic. This early action allowed for subsequent restrictive measures that would affect business operations across Illinois, providing a basis for ERTC claims due to initial disruptions.

  • Stay-at-Home Order (March 2020)- This order mandated all residents to stay at home unless for essential activities, leading to the temporary closure of non-essential businesses. The direct cessation of operations across numerous sectors supports businesses’ claims for the ERTC, as they were mandated to suspend operations.

  • Mandatory Closure of Non-Essential Businesses (March 2020) - Non-essential businesses such as theaters, gyms, and dine-in restaurants were ordered to close. This government-mandated closure is a qualifying factor for the ERTC by causing a full or partial suspension of business activities.

  • Mandatory Mask Requirement (May 2020) - The statewide mandate required masks in public places and where social distancing isn’t possible, imposing new operational costs and challenges on businesses to manage compliance and customer interactions.

  • Phased Reopening Plan (June 2020) - Illinois introduced a phased approach to reopening, known as the “Restore Illinois” plan, allowing businesses to resume operations under strict capacity limits and health protocols. Despite reopening, these restrictions continued to limit business functionality and profitability, relevant for ERTC eligibility due to partial suspension of normal operations.

  • Extension of Unemployment Benefits (2020) - Extended unemployment benefits affected businesses’ ability to recall workers, influencing workforce management and operational capacity, relevant for documenting ERTC claims during the periods of reduced staffing.

  • Ban on Large Gatherings (2020-2021) - With ongoing restrictions on the size of gatherings, venues and businesses that depend on event-based revenue continued to face operational limitations, reinforcing their ERTC claims due to restricted capacity and direct revenue impacts.

  • Financial Assistance Programs for Businesses (2020-2021) - Illinois launched several financial aid programs aimed at supporting businesses facing severe economic distress. Participation in these programs underscores the financial impact experienced and supports ERTC documentation by illustrating the necessity for additional support to retain employees.

  • Remote Work Encouragement (Ongoing from 2020)** - Businesses were encouraged to maintain remote work where possible, necessitating adjustments in operations and possibly incurring additional costs to facilitate this shift, impacting businesses’ financial and operational strategies.

  • Lifting of Certain Restrictions (2021) - As restrictions began to lift, businesses continued to face challenges in returning to pre-pandemic operation levels and profitability. Documenting the ongoing economic impacts even after the lifting of restrictions is crucial for businesses claiming the ERTC for extended periods of disruption.

Governor J.B. Pritzker's administration in Illinois implemented these measures to mitigate the spread of COVID-19 while trying to manage economic impacts. For Illinois businesses preparing for an Employee Retention Tax Credit Audit, it is critical to document how each state order impacted 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.

Local Impact of COVID-19 Orders on Illinois's Business Community

As the COVID-19 pandemic unfolded, its impact varied significantly across Illinois, affecting each region in unique ways based on its primary economic activities. From the bustling streets of Chicago to the agricultural and manufacturing heartlands of Central and Southern Illinois, businesses faced numerous challenges that necessitated strategic adaptations and extensive documentation for financial recovery efforts, including the Employee Retention Tax Credit (ERTC).

  • Chicago: Service, Hospitality, and Retail Disruptions - In Chicago, a major urban center known for its vibrant service, hospitality, and retail sectors, the pandemic's impact was profoundly disruptive. The city saw forced closures and significant operational limitations that stemmed directly from government-mandated public health measures. Restaurants, hotels, and retail stores, which depend heavily on high foot traffic, faced extended periods of reduced or no business activity as lockdowns and social distancing rules kept customers away. Many establishments had to pivot quickly to online sales or takeout and delivery services to maintain some level of operations. The adaptation costs, combined with significant revenue losses, placed enormous strain on these businesses. For ERTC claims, documenting these changes and their financial impact is crucial. Detailed records of closure periods, changes in service delivery, and efforts to retain employees despite reduced operations are essential for substantiating eligibility for tax credits and preparing for potential IRS audits.
  • Chicago: Educational Institutions and Childcare Services Disruptions - In Chicago, educational facilities, including schools, colleges, and childcare centers, faced significant operational challenges due to pandemic-related public health orders. With the swift transition to remote learning, these institutions had to invest heavily in digital infrastructure to continue their educational services. Childcare centers, vital for working parents, experienced closures or severe capacity limits, which drastically reduced their operational viability and income. These institutions had to adapt by implementing safety protocols to eventually reopen safely and partially, often at increased operational costs. For ERTC claims, it is essential for these entities to maintain detailed financial records showing the expenditures on technology and safety upgrades, alongside documentation of reduced income and efforts to retain staff through uncertain times. This documentation is critical to establish eligibility for the ERTC during audits, highlighting the direct link between government orders and financial distress.
  • Chicago: Arts and Entertainment Venues - The arts and entertainment sector in Chicago, including theaters, concert halls, and museums, was particularly hard hit by the pandemic. Government mandates required these venues to close entirely or operate at significantly reduced capacity to comply with social distancing guidelines. Many events were canceled or postponed indefinitely, leading to a substantial loss of revenue. Venues that could offer virtual performances or viewings faced additional costs associated with streaming technology and adapting productions to online formats. Compiling comprehensive records of event cancellations, capacity restrictions, and the associated financial impacts is crucial for these businesses. Additionally, they should document any investments made into digital platforms and efforts to maintain employment for performers, technicians, and support staff during closures. This evidence is vital for substantiating ERTC claims and demonstrating the direct impact of COVID-19 restrictions on their operations.
  • Central Illinois:  Agricultural and Manufacturing Challenges - The pandemic disrupted distribution channels and altered market demands in Central Illinois, known for its robust agricultural output and manufacturing capabilities. Farmers and manufacturers had to contend with both logistics issues and fluctuating demand as global supply chains were impacted and consumer behavior shifted dramatically. For agriculture, disruptions in exporting goods or delivering to local markets due to transport restrictions significantly affected revenue. Manufacturers faced challenges in procuring raw materials and selling products amid economic downturns. Businesses in these sectors need to document how these disruptions affected their production volumes, sales, and employment practices, providing a clear link between COVID-19 impacts and the necessity to retain staff during fluctuating market conditions.
  • Southern Illinois: Compound Economic Strains - Southern Illinois, also reliant on manufacturing and agriculture, experienced similar challenges to those in Central Illinois, compounded by reduced tourism and consumer spending. The region, which benefits from tourism related to its natural attractions and historical sites, saw a sharp decline in visitor numbers, further impacting local economies already hit hard by disruptions in manufacturing and farming. The double blow of reduced industrial activity and tourism created a complex financial landscape for businesses. Documenting the specific economic impacts in this region is vital for businesses seeking ERTC. They must detail the extent of revenue losses, operational shifts, and employee retention efforts to manage through the pandemic.

For all these regions in Illinois, accurately documenting the economic impacts of the pandemic is not just critical for historical and financial analysis but is crucial for leveraging government support programs like the ERTC.

The narrative of how businesses navigated these challenging times, adapted their operations, and strived to keep their workforce intact is essential for securing necessary financial relief and preparing effectively for IRS scrutiny. This comprehensive approach ensures that businesses are well-prepared to demonstrate the full extent of the pandemic's impact and justify their eligibility for significant tax credits.

A How-To Guide When Dealing With ERTC Audits

Employee Retention Tax Credit (ERTC) audits can be daunting for Illinois businesses. To navigate these successfully, preparation is key. This guide outlines steps Illinois businesses can take to prepare for an ERTC audit and strategies for collaborating effectively with a tax attorney to ensure the best possible outcome.

Step 1: Understand the ERTC Requirements

Before an audit occurs, it's crucial for businesses to understand the ERTC eligibility requirements fully. This includes knowing which expenses qualify for the credit and the necessary documentation to support these claims. Businesses should review the IRS guidelines on what constitutes a significant decline in gross receipts and which government orders affected operations. Familiarizing themselves with these details will help businesses anticipate what the IRS will look for during an audit.

Step 2: Gather and Organize Documentation

Documentation is the foundation of a successful ERTC audit defense. Illinois businesses should gather all relevant documents that can substantiate their claim. This includes:

  • Payroll Records: Detailed reports showing wages paid to employees during the eligible periods.
  • Financial Statements: Comparative financial statements from 2019 and 2020 to demonstrate a decline in gross receipts.
  • Employee Records: Documentation of employee headcounts and hours worked.
  • Operational Records: Details of business operations affected by COVID-19, including any government orders that led to business modifications or closures.

Organizing these documents chronologically and by category will help streamline the audit process.

Step 3: Conduct a Pre-Audit Self-Check

Performing a self-audit can identify potential red flags before the IRS does. This process involves reviewing the ERTC claim to ensure accuracy and completeness of the documentation. Illinois businesses should check calculations, verify that all claimed expenses are eligible under the ERTC, and confirm that no excluded expenses (such as wages counted towards PPP forgiveness) are included.

Step 4: Consult with a Tax Attorney Early

As soon as an audit notice is received—or ideally when initially filing for the ERTC—businesses should engage with a tax attorney who specializes in tax credits and IRS audits. A tax attorney can provide crucial guidance on legal complexities and help reinforce the business's audit defense strategy.

A tax attorney can help identify legal risks associated with the ERTC claim. They can advise on areas such as the dual benefits rule (e.g., PPP and ERTC overlap), the substantiation of claims, and potential penalties for non-compliance. Understanding these risks will help prepare the business for the types of questions and challenges that may arise during the audit.

Step 6: Develop a Response Plan

Work with the tax attorney to develop a response plan for the audit. This plan should outline who will handle communications with the IRS, how information will be presented, and what documentation will be shared. The tax attorney can play a pivotal role in framing the response strategy, ensuring that communications are clear, professional, and legally sound.

Step 7: Simulate the Audit

If possible, simulate the audit process with the tax attorney. This can include mock interviews and a review of the documentation presentation. This simulation will help prepare the business for the actual audit environment, reducing anxiety and improving performance when interacting with IRS auditors.

Conclusion: Ensuring Continued Benefits from the ERTC in Illinois

For businesses across Illinois, 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 Illinois’s diverse 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: May 18, 2024

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