Brotman Law May 13, 2024 18 min read

ERTC Audit Defense Guide for Indiana Businesses

How Indiana Businesses Can Protect Their Employee Retention Tax Credits From IRS Audit Enforcement

In Indiana, where the economic landscape is characterized by robust manufacturing in regions like Elkhart, significant agricultural activities throughout the state, and burgeoning tech sectors in Indianapolis, the Employee Retention Tax Credit (ERTC) has provided essential financial support during the COVID-19 pandemic. This federal program helps businesses maintain their workforces in the face of economic hardship. However, accessing the ERTC also opens these businesses to potential IRS audits. For Indiana enterprises, mastering the details of ERTC compliance is critical to ensuring they can continue to benefit from the program and effectively navigate potential audits.

This guide will detail effective strategies for ERTC audit defense in Indiana, emphasizing the importance of comprehensive preparation and the role of professional legal advice.

Overview of the ERTC in Indiana's Economic Context

The ERTC offers a refundable tax credit to employers who retained employees despite experiencing significant declines in gross receipts or undergoing full or partial suspensions of their business operations due to government-mandated COVID-19 restrictions. For businesses across Indiana, particularly those impacted by disruptions in manufacturing supply chains or changes in consumer behavior, documenting these impacts is crucial.

Indiana Statewide Orders That Can Be Used to Justify Taking the Employee Retention Tax Credit

 

  • Public Health Emergency Declaration (March 2020) - Governor Eric Holcomb declared a public health emergency, enabling the state to respond rapidly to the pandemic. This declaration set the stage for financial assistance measures and regulatory adjustments, critical for businesses assessing initial disruptions and planning for ERTC claims.

  • Stay-at-Home Order (March 2020) - This comprehensive order required residents to stay home except for essential activities, leading to the temporary closure of non-essential businesses. The direct suspension of operations supports businesses’ claims for the ERTC, as they were forced to cease or significantly limit their operations.

  • Mandatory Closure of Non-Essential Businesses (March 2020) - Non-essential businesses were ordered to close, affecting a wide range of industries including retail, entertainment, and personal services. This government-mandated closure is a qualifying factor for the ERTC by causing a full or partial suspension of business activities.

  • Mask Mandate (July 2020) - A statewide mask mandate required face coverings in public spaces, imposing new compliance costs and operational challenges on businesses to manage and enforce the mandate, affecting customer interactions and potentially reducing foot traffic.

  • Back on Track Indiana Plan (May 2020) - Governor Holcomb introduced a phased reopening plan, which allowed businesses to gradually resume operations with capacity limits and strict health protocols. Despite reopening, these ongoing restrictions continued to limit business functionality and profitability, relevant for ERTC eligibility due to partial suspension of normal operations.

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

  • Temporary Moratorium on Evictions and Foreclosures (March 2020) - This order provided temporary relief for businesses concerning commercial properties, helping them manage cash flow during critical periods of revenue loss and maintain operational stability.

  • Adjustments to Unemployment Benefits (2020) - Enhanced unemployment benefits were made available, affecting businesses’ ability to maintain or recall their workforce. This situation is pertinent for ERTC claims, demonstrating challenges in employee retention amid financial and operational stress.

  • Restrictions on Large Gatherings (Ongoing from 2020 into 2021) - With limitations on the size of gatherings, venues and businesses reliant on large public attendance continued to face operational restrictions, supporting their ERTC claims due to restricted operational capacity and direct revenue impacts.

  • Vaccination Rollout and Adjustments to Business Operations (2021)- As vaccines became available, businesses faced new challenges in managing vaccination policies and adjusting operations to align with evolving public health guidelines, affecting how they could safely increase capacity and alter their business models.

Throughout the pandemic, Governor Eric Holcomb’s administration took various measures to mitigate the spread of COVID-19 while attempting to balance economic impacts. For Indiana businesses preparing for an Employee Retention Tax Credit Audit, documenting how each state order affected their operations, financial health, and employment practices is crucial.

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.

Indiana Local Economic Impact Caused By Government Orders

 The COVID-19 pandemic dramatically reshaped the economic landscape across Indiana, impacting various sectors from technology and business services in Indianapolis to manufacturing in Elkhart and agriculture throughout the state’s rural communities. Each region faced its own set of challenges, necessitating strategic adaptations and detailed documentation of these changes to substantiate Employee Retention Tax Credit (ERTC) eligibility and prepare effectively for potential IRS audits.

  • Indianapolis: Tech and Business Sector Adjustments - In Indianapolis, a burgeoning hub for technology and business, companies encountered significant hurdles as the pandemic necessitated a rapid shift to remote work. This transition was not just about moving operations from offices to homes but also overcoming service delivery challenges and maintaining productivity in a vastly altered work environment. Tech companies, in particular, had to invest in secure and reliable digital infrastructures to support their workforce remotely. Additionally, businesses had to navigate interruptions in customer engagement and project timelines, which in turn affected their revenue streams and operational dynamics. For these businesses, documenting the extent of the shift to remote work, associated costs, and the impact on service delivery is crucial. This information is essential for demonstrating how the pandemic necessitated maintaining employment despite reduced physical operations, a key aspect of qualifying for the ERTC.

  • Elkhart: Manufacturing Disruptions - Elkhart, known primarily for its robust manufacturing sector, particularly RVs and automotive parts, felt the sting of the pandemic acutely. Factory shutdowns and pervasive supply chain disruptions led to significant production halts. Manufacturers faced delays in receiving essential materials and parts, while simultaneously navigating health and safety regulations that affected workforce capacity. The resultant production slowdown not only impacted the manufacturers but also rippled across the local economy, affecting suppliers and service providers dependent on these large manufacturers. For businesses in Elkhart, it is vital to document these disruptions in detail, including the duration of shutdowns, specifics of supply chain issues, and steps taken to mitigate the impact on production and retain workers, to support their ERTC claims.
  • Hoosier State Agricultural Communities:  Facing Market and Supply Chain Volatility - Indiana’s agricultural communities were not spared from the pandemic's reach, dealing with dual challenges of disrupted supply chains and fluctuating market demands. Farmers had to adapt to rapid changes in the marketplace, where demand from large buyers like restaurants and schools dramatically decreased, while consumer demand for direct purchases sometimes increased.

    These shifts required quick pivots in sales strategies and distribution logistics, often incurring additional costs and labor efforts. Additionally, disruptions in obtaining necessary farming inputs like seeds and equipment due to global supply chain slowdowns further complicated their operational capabilities. Documenting these challenges is crucial for agricultural businesses seeking the ERTC, as they must demonstrate how these factors directly impacted their revenue and operations, necessitating sustained employment levels to manage through the crisis.

For businesses across Indiana, the narrative of navigating the pandemic is one of resilience, adaptation, and strategic foresight. Accurately documenting the economic impacts of COVID-19 is crucial for historical accounting and securing necessary financial support through mechanisms like the ERTC. This comprehensive documentation ensures that businesses can effectively demonstrate to the IRS the extent of the pandemic’s impact and justify their eligibility for crucial financial relief.

Industry-Specific Strategies for ERTC Audits

For Indiana businesses, particularly those in sectors like agriculture, manufacturing, and hospitality, the approach to preparing for an IRS audit over Employee Retention Tax Credit (ERTC) claims needs to be tailored to the specific characteristics and operational models of the industry. Including practical examples from these sectors will help illuminate the challenges and strategies involved in defending an ERTC audit.

Practical Examples of Industry-Specific Employee Retention Tax Credit Audit Preparation

Indiana Agricultural Businesses:

Agriculture in Indiana often operates on a seasonal basis, with significant fluctuations in employment numbers throughout the year. For example, during planting or harvest seasons, an agricultural business might significantly increase its number of employees, which impacts the ERTC calculations. It is crucial for these businesses to maintain detailed records of employment for each season to substantiate their full-time employee counts during the specific periods they are claiming the ERTC.

Additionally, agricultural businesses should document any government orders affecting their operations—such as restrictions on the number of workers allowed in fields or packing facilities at one time—and the direct impact of these orders on their operations. This documentation should explicitly connect operational disruptions to pandemic-related government mandates, a key factor in establishing eligibility for the ERTC.

Indiana Manufacturing Businesses:

Manufacturing firms, especially those involved in production processes critical to pandemic response (like manufacturing of PPE or medical supplies), may have been subject to varied operational impacts due to COVID-19. For instance, a manufacturer in Indiana that had to alter shifts to comply with social distancing regulations should prepare detailed shift records, including times, dates, and employee counts per shift. This information should be paired with official public health orders or mandates that necessitated these operational changes.

Furthermore, if a manufacturing business had to reduce production due to a drop in demand (e.g., automotive parts during a decline in car sales), it should prepare financial statements showing the correlation between the pandemic's economic impact and the company's revenue declines.

Indiana Hospitality Businesses:

Restaurants, hotels, and other hospitality businesses in Indiana have been dramatically affected by local and state COVID-19 regulations, such as capacity limits and full closures. These businesses should gather all relevant government orders along with records that detail the dates and specifics of how their operations were limited. For example, a restaurant that could only serve outdoors or a hotel that was forced to limit occupancy should have detailed guest and booking records correlating to these periods.

Moreover, hospitality businesses should keep detailed payroll records that reflect any changes in employee wages due to reduced hours or layoffs. Documentation of efforts to retain employees despite reduced operations—like payroll records showing continued payment to employees not currently working full hours—will be critical in defending their ERTC claims.

Conclusion and Role of a Tax Attorney

Indiana businesses facing an ERTC audit should approach their preparation with meticulous attention to industry-specific details highlighting compliance and credit eligibility. The role of a tax attorney becomes indispensable in this context, as they can provide expert guidance on the nuances of ERTC claims, represent the business during IRS communications, and ensure that all documentation is strategically aligned with IRS requirements. By incorporating detailed industry-specific examples into their audit preparation, businesses can help defend themselves against IRS enforcement, minimizing potential liabilities and ensuring that they receive the Employee Retention Tax Credits that they are entitled to. 

Ensuring Continued ERTC Benefits in Indiana

For businesses across Indiana, effectively managing ERTC claims involves more than just meeting eligibility requirements; 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 Indiana’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: May 18, 2024

Receive the Best of
Brotman Law

Get this topic delivered straight to your inbox.

New call-to-action

COMMENTS

BECOME AN INSIDER

Our best stuff: secrets, tax saving tools, and tax defense strategies from the braintrust at Brotman Law.

  • Expanded benefits during your first consultation with the firm.
  • Priority appointment scheduling and appointment times.
  • Complementary access to our firm’s concierge services.
  • Receive updates and “insider only” tax strategies and tactics.
  • And many more benefits.

Not Sure Where to Start?

Step 1 Start Here

Start Here

These ten big ideas will change the way you think about your taxes and your business.

Start Here

Step 2 Learn About Your Situation

Learn About Your Situation

Find the articles and videos you need to make the right tax decisions in the learning center.

Visit the Learning Center

Step 3 Explore Our Services

Explore Our Services

It is not just about what we do, but who we are, why we do it, and how that benefits you.

View All Services

Step 4 Get Your Game Plan

Get Your Game Plan

Meet with us to outline your strategy. No further obligation, 100% money-back guarantee.

Book an Action Plan