Brotman Law July 9, 2024 19 min read

Preparing for an ERTC Audit: A Checklist for Maine Businesses

What Maine Business Owners Need To Get Through An ERTC Audit

In Maine, where the economy is supported by industries such as tourism along the coast, forestry in the inland regions, and a significant seafood industry, the Employee Retention Tax Credit (ERTC) has played a crucial role in helping businesses manage the economic fallout of the COVID-19 pandemic. This federal program supports companies that have maintained their workforce despite significant operational and financial challenges. However, taking advantage of the ERTC also exposes these businesses to potential IRS audits. For Maine companies, a thorough understanding of ERTC compliance is vital to maximize the benefits of the program and effectively manage potential audits

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

Understanding the ERTC in Maine’s Business Environment

The ERTC offers a refundable tax credit to employers who retained employees despite significant declines in gross receipts or undergoing full or partial suspensions of their operations due to government-mandated COVID-19 restrictions. For businesses across Maine, 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.

Maine Statewide Orders That May Have Impacted Your Business

Certainly! Here's a detailed summary of ten significant COVID-19 orders issued in Maine during 2020 and 2021 under Governor Janet Mills, which significantly impacted businesses, particularly in relation to the Employee Retention Tax Credit (ERTC) Audit.

  • State of Emergency Declaration (March 2020) - Governor Janet Mills declared a state of emergency, enabling Maine to mobilize state resources and set the stage for stringent pandemic-related measures. This was crucial for businesses beginning to assess and document operational disruptions for ERTC eligibility.
  • Closure of Non-Essential Businesses (March 2020) - Non-essential businesses such as entertainment venues, gyms, and personal care services were mandated to close temporarily. This direct suspension of operations supports businesses’ claims for the ERTC as they faced government-imposed shutdowns.
  • Stay Healthy at Home Order (March 2020) - This order required Mainers to stay at home unless for essential activities, reducing customer traffic and impacting the ability of businesses to operate normally. This supports ERTC claims as businesses faced forced reductions in operational capacity.
  • Mandatory Mask Mandate (May 2020) - Maine implemented a statewide mandate requiring masks in public places, adding operational challenges for businesses in managing compliance, which impacted customer interactions and potentially reduced revenues.
  • Phased Reopening Plan (May 2020) - The state introduced a phased approach to reopening, allowing businesses to gradually resume operations but with strict capacity limits and mandatory safety protocols. Despite reopening, these restrictions continued to affect business functionality and profitability, relevant for ERTC due to partial suspensions of normal operations.
  • Ban on Large Gatherings (2020-2021) - Continued restrictions on the size of gatherings affected venues and businesses reliant on large-scale events, reinforcing their ERTC claims due to restricted operational capacity and direct revenue impacts.
  • Extension of State of Emergency (Multiple Extensions) - Governor Mills extended the state of emergency multiple times, reflecting the ongoing impact of the pandemic, reinforcing the need for continuous documentation of business disruptions for ERTC eligibility.
  • Financial Assistance Programs for Businesses (2020-2021) - Maine launched several financial aid programs aimed at supporting businesses facing severe economic distress. Participation in these programs underscores the financial impact experienced, supporting ERTC documentation by illustrating the need for additional support to retain employees.
  • Adjustments to Unemployment Benefits (2020) - Enhanced unemployment benefits were provided, impacting businesses’ workforce decisions and capabilities, particularly as some employees opted to remain on unemployment. This dynamic is pertinent for ERTC claims, highlighting challenges in maintaining staff levels amid financial and operational stress.
  • Guidelines for Safe Business Operations (2020-2021) - Detailed safety guidelines were issued for various sectors, necessitating additional investments in health and safety measures, which impacted operational costs and strategies.

Throughout the pandemic, Governor Janet Mills’ administration took various measures to mitigate the spread of COVID-19 while trying to manage its economic impact. For Maine businesses preparing for an ERTC 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 Key Maine Sectors

The COVID-19 pandemic wrought significant upheaval across various sectors in Maine, a state renowned for its vibrant tourism, robust forestry and timber industries, and bustling seafood sector. Each of these vital areas faced unique challenges due to the pandemic, highlighting the critical need for businesses to meticulously document the economic impacts for purposes such as substantiating ERTC eligibility and preparing for potential IRS audits.

  • Bar Habor's Impact on Maine's Tourism: Maine's picturesque landscapes, including its extensive coastline and natural parks, are perennial draws for tourists from around the world. However, the pandemic-induced travel restrictions and public health advisories led to a dramatic reduction in tourist numbers. Hotels, restaurants, recreational facilities, and retail stores that typically thrive on the influx of tourists during peak seasons experienced unprecedented downturns. The ripple effects were profound, impacting not only business owners but also employees and local economies reliant on tourism dollars. For businesses in the tourism sector, accurate documentation of reduced visitor numbers, revenue losses, and specific operational changes is essential. These records are critical for supporting ERTC claims, as they provide quantifiable evidence of the pandemic's direct impact on business operations and the efforts made to retain staff under challenging economic conditions.
  • Forestry and Timber Industry Disruptions in Bangor: Maine's forestry and timber industries, crucial to the state's economy, encountered significant disruptions during the pandemic. Market downturns and logistic challenges, including transportation disruptions and trade restrictions, affected the flow of goods and led to operational bottlenecks. The sudden changes in market demand, particularly from the construction and paper industries, further complicated the landscape. For companies in these sectors, maintaining detailed records of market conditions, logistic issues, operational adjustments, and financial impacts is vital. These documents are indispensable for ERTC audits, as they detail the operational disruptions faced and the measures taken to mitigate these challenges while striving to maintain employment levels.
  • Challenges in the Seafood Industry in Portland: The seafood industry, integral to Maine's identity and economy, faced its own set of severe disruptions. Fishermen and seafood processors saw a significant drop in demand, primarily due to the closure of restaurants — both domestically and internationally — and challenges in exporting seafood products. The industry had to quickly adapt to shifting market dynamics, finding new distribution channels and often selling directly to consumers. Accurate documentation of these shifts—detailing changes in demand, new sales channels, and the overall economic impact—is crucial for seafood businesses. This information supports ERTC claims by demonstrating substantial operational impacts and ongoing efforts to adapt business models and retain employees during periods of reduced demand.
  • Lewiston: Manufacturing and Industrial Slowdown. Lewiston, a city with a strong base in manufacturing and industrial services, experienced significant disruptions due to pandemic safety measures. Factories and plants had to either shut down temporarily or operate at reduced capacity to comply with social distancing guidelines, affecting their production schedules and workforce. Businesses in Lewiston should maintain detailed records of shutdown durations, capacity reductions, and how they managed to retain employees during these periods, as these are crucial details for ERTC claims.
  • Auburn: Small Business and Retail Challenges. Auburn, known for its small businesses including retail shops, faced considerable challenges as non-essential businesses were ordered to close during the early phases of the pandemic. Many businesses had to quickly shift to online sales or curbside pickup services to maintain operations. Documenting the transition to digital platforms, the impact on sales, and efforts to keep employees on the payroll despite reduced business activities is essential for substantiating ERTC claims in Auburn.
  • South Portland: Service Sector and Hospitality Industry Impact. South Portland, with its bustling service sector and proximity to Portland's tourist attractions, saw significant impacts particularly in the hospitality industry. Hotels, restaurants, and leisure facilities faced severe restrictions on operation, leading to lost revenue and forced layoffs or furloughs. Businesses in South Portland should compile comprehensive records of revenue decline, operational changes, and strategies implemented to retain staff, such as shifting to takeout and delivery for restaurants, which are important for ERTC documentation.
  • Biddeford: Arts and Cultural Sector Disruption. Biddeford, with its growing arts and cultural scene, including galleries, theaters, and artisan shops, was hit hard by the restrictions on public gatherings. The cancellation of cultural events and the closure of arts venues not only impacted the artists but also the surrounding businesses that rely on event-driven foot traffic. Recording the specifics of event cancellations, lost opportunities, and measures to support affected employees will support ERTC claims in Biddeford.
  • Saco: Tourism and Recreational Services. Saco, known for its recreational offerings such as amusement parks and riverfront activities, experienced a downturn in tourism, directly affecting businesses in the hospitality and recreation sectors. The seasonal nature of many of these businesses compounded the financial strain, making it difficult to sustain operations and retain staff. Detailed documentation of operational suspensions, adaptations to service offerings, and employee retention efforts are crucial for businesses in Saco applying for the ERTC.

For businesses across these diverse sectors in Maine, the narrative of navigating through the pandemic underscores the importance of resilience and adaptability. Comprehensive and accurate documentation of the economic impacts and operational challenges is not just a regulatory requirement but a critical component of financial strategy and audit preparedness. This detailed documentation not only supports financial recovery efforts but also ensures that businesses are well-prepared for IRS audits, effectively demonstrating the extent of the pandemic's impact and justifying their eligibility for financial relief through measures like the ERTC.

Common Triggers for IRS Audits in Maine

Businesses in Maine might face IRS audits due to:

  • Inconsistencies in Financial Reporting: Discrepancies 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 additional scrutiny.
  • Random Selection: Routine checks by the IRS to ensure compliance and verify the accuracy of claims.

Avoiding Common Mistakes in ERTC Claims

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

  • Misinterpreting Eligibility Criteria: Incorrect assessments of what qualifies as significant operational disruption or substantial decline in gross receipts.
  • Inadequate Documentation: Failing to maintain detailed records that clearly link operational changes and financial outcomes directly to the pandemic.
  • Errors in Calculation: Mistakes in calculating the eligible amount due to complexities in payroll data or misunderstanding IRS guidelines.

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 directly 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 Maine, 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 businesses in organizing and reviewing documentation to ensure it robustly supports the ERTC claim.
  • Representation During Audits: Managing 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 readiness, Maine 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 can be 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 Maine

Businesses in Maine must do more than simply qualify for ERTC claims; they need a comprehensive approach that includes strategic planning and careful documentation. Proactively defending against potential audits and utilizing expert legal advice are also essential. These practices help businesses handle ERTC audits confidently, ensuring their financial stability and fostering growth in Maine's diverse economy.

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-Aileen Dwight, Licensed Clinical Social Worker & Psychotherapist

Last updated: July 10, 2024

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