Brotman Law May 13, 2024 21 min read

Optimizing ERTC Audit Defense for Michigan Businesses

Michigan Employee Retention Tax Credit Audit Defense Guide

In Michigan, where the economy is driven by a diverse range of industries from automotive manufacturing in Detroit to tourism in the Upper Peninsula and agriculture across the state, the Employee Retention Tax Credit (ERTC) has played a crucial role during the economic hardships brought on by the COVID-19 pandemic. This federal initiative supports businesses that have maintained their workforce despite experiencing significant operational and financial challenges. However, receiving the ERTC also means that businesses are subject to potential IRS audits. For Michigan companies, a thorough understanding of ERTC compliance is essential to maximize the program's benefits and navigate potential audits successfully.

This guide will provide strategies for ERTC audit defense tailored to the economic landscape of Michigan, emphasizing the importance of diligent preparation and the role of specialized legal advice in effectively managing these challenges.

Understanding the ERTC in Michigan’s Economic Context

The ERTC offers a refundable tax credit to employers who retained employees during periods of significant revenue declines or operational suspensions mandated by governmental COVID-19 restrictions. For Michigan businesses, particularly those affected by auto industry slowdowns or disruptions in tourism and hospitality, documenting how these factors impacted their operations is critical.

Michigan Statewide Orders That May Have Impacted Their Business

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

  • State of Emergency Declaration (March 2020) - Governor Gretchen Whitmer declared a state of emergency, mobilizing state resources and setting the stage for subsequent restrictive measures. This foundational action was crucial for businesses to begin assessing and documenting operational disruptions for ERTC eligibility.

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

  • Mandatory Closure of Specific Businesses (March 2020) - Businesses such as gyms, theaters, and dine-in restaurants were specifically ordered to close, drastically affecting their revenue and operations. These closures qualify these businesses for the ERTC due to government-mandated suspension of operations.

  • Face Mask Mandate (April 2020) - The statewide mandate required masks in all public indoor spaces and crowded outdoor settings, imposing new operational costs and challenges on businesses to enforce compliance, relevant for ERTC claims by affecting operational practices.

  • Phased Reopening Plan (June 2020) - Michigan introduced a phased approach to reopening, allowing businesses to resume operations under strict capacity limits and health protocols. Despite reopening, the continued limitations impacted business functionality and profitability, relevant for ERTC eligibility due to partial suspension of normal operations.

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

  • Extended Unemployment Benefits (2020) - The extension of unemployment benefits impacted businesses’ workforce management, as some employees opted to remain on unemployment. This situation is pertinent for ERTC claims, demonstrating challenges in maintaining staff levels amid financial and operational stress.

  • Remote Work Requirements (2020) - Where possible, businesses were required to maintain remote work arrangements. This shift necessitated investments in technology and adjustments in operations, impacting businesses’ financial and operational strategies, and supporting ERTC eligibility by showing efforts to continue employment amid disruptions.

  • Financial Assistance Programs for Businesses (2020-2021) - Michigan deployed financial assistance programs to support businesses facing severe economic distress. Documentation of participation in these programs can substantiate the financial impacts experienced, supporting ERTC claims by illustrating the need for additional support.

  • Emergency Orders Adjusted and Extended (2021) - Throughout 2021, Governor Whitmer adjusted and extended emergency orders based on the state of the pandemic, reflecting the ongoing impact on businesses. These continued restrictions, even as they evolved, underscored the persistent operational challenges businesses faced, justifying continued ERTC claims.

Throughout the pandemic, Governor Gretchen Whitmer's administration in Michigan implemented a series of measures aimed at balancing public health safety with economic impacts. For Michigan 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.

Impact of COVID-19 on Key Michigan Business Sectors

As the COVID-19 pandemic swept through Michigan, it brought widespread economic disruption that varied across the state’s distinct regions. From the automotive powerhouses in Detroit and its surrounding areas to the tourism-dependent locales of the Upper Peninsula and the agricultural heartlands, each faced unique challenges that reshaped their economic landscapes. Accurately documenting these impacts is not only crucial for understanding the full extent of the pandemic’s effects but also essential for substantiating Employee Retention Tax Credit (ERTC) eligibility and preparing for potential IRS audits.

  • Detroit and Surrounding Areas: Automotive Industry Setbacks - In Detroit and its surrounding areas, the automotive industry—a cornerstone of Michigan’s economy—faced unprecedented challenges. The onset of the pandemic led to widespread factory shutdowns as companies struggled to protect workers from the virus and grappled with supply chain disruptions caused by global lockdowns. These interruptions were not merely about halting production; they represented significant disturbances in a finely tuned supply network, from parts suppliers to assembly plants. The ripple effect was massive: when factories shut down, the demand for parts from suppliers evaporated, and the entire economic ecosystem surrounding the automotive industry suffered. For businesses in this sector, documenting these disruptions is critical. This includes detailing the duration of shutdowns, the impact on supply chains, and the steps taken to retain employees despite reduced operations, all of which are essential for validating ERTC claims.
  • Detroit: Hospitality and Entertainment Decline - Detroit's hospitality and entertainment sectors faced severe disruptions due to COVID-19 restrictions. The city, known for its vibrant cultural scene, including theaters, concert venues, and casinos, saw these facilities close or operate at significantly reduced capacities. Many hotels also faced a steep decline in occupancy rates as travel restrictions curtailed visitor numbers. The economic impact was profound, leading many businesses in these sectors to maintain employment levels with difficulty. Documenting the duration of closures and reduced operations, alongside efforts to keep staff employed, would be crucial for these businesses when applying for the ERTC.

  • Grand Rapids: Health Services Disruption - Grand Rapids, a city with a strong medical and health services sector, experienced significant disruptions as non-emergency medical procedures were postponed or canceled to prioritize COVID-19 care. This impacted hospital revenues and the myriad of ancillary services such as outpatient care centers and private practices. Health services providers had to maintain their staffing without the regular flow of patients. For ERTC claims, these businesses would need to detail how they retained employees and the financial impact of shifting their focus to the pandemic response.
  • Warren: Manufacturing Slowdown - Warren, home to many manufacturing facilities, particularly in the automotive sector, faced operational shutdowns and slowdowns as part of COVID-19 safety measures. The reduction in workforce capacity and the disruption of supply chains led to a significant decrease in production rates. Manufacturing firms in Warren would qualify for the ERTC by documenting the specifics of operational disruptions, including the extent and duration of reduced production and efforts to compensate or retain workers during this period.
  • Sterling Heights: Retail Constraints - Sterling Heights, with its robust retail sector, saw substantial disruptions as statewide lockdowns and ongoing restrictions limited customer access to non-essential businesses. Many retail stores had to rapidly pivot to online sales or curbside pickup services, incurring additional costs and logistical challenges. The impact on small to medium-sized retailers was particularly harsh, threatening the viability of these businesses. For ERTC eligibility, retailers in Sterling Heights would need to demonstrate the impact of capacity restrictions on their operations and how they managed to keep employees on the payroll despite reduced customer traffic.
  • Ann Arbor: Educational and Research Disruptions - Ann Arbor, a city centered around the University of Michigan, faced unique challenges as educational and research activities were severely disrupted. The shift to remote learning and the suspension of in-person classes affected the university and the local economy, which was reliant on student and faculty presence. Research projects were delayed or halted, impacting associated employment. Educational institutions and related businesses could apply for the ERTC by documenting these disruptions and outlining how they strived to retain employees amidst financial constraints imposed by the pandemic.
  • Upper Peninsula: Tourism Industry Losses - The Upper Peninsula, known for its picturesque landscapes and outdoor recreational activities, relies heavily on tourism. However, travel restrictions and public health concerns dramatically reduced visitor numbers, dealing a harsh blow to the region’s economy. Hotels, restaurants, and small businesses that cater to tourists faced months of diminished revenue, forcing many to rethink their business models or pivot to new types of service, such as local or virtual tourism experiences. Documenting these changes is vital for these businesses. They must provide detailed accounts of how travel restrictions directly led to reduced revenues and the strategies employed to mitigate these impacts and retain staff, thereby supporting their eligibility for the ERTC.
  • Agricultural Regions: Market Fluctuations and Distribution Hurdles -  Michigan’s agricultural regions encountered their own set of challenges. Farmers and agricultural processors experienced significant fluctuations in demand, particularly from commercial buyers like restaurants and schools, which faced their operational constraints. Additionally, disruptions in distribution channels further complicated the market landscape, affecting the ability to get products to market efficiently. For agricultural businesses, detailed documentation of these market fluctuations, the specific impacts on sales, and efforts to maintain a stable workforce despite these challenges are crucial for ERTC claims. This documentation should highlight the direct correlation between the pandemic-induced market changes and the financial health of their operations.

For Michigan businesses across these diverse regions, the narrative of navigating through the pandemic is characterized by adaptation, resilience, and strategic decision-making. Detailed documentation of economic impacts and operational changes is not just about capturing financial losses but also about detailing the efforts made to adapt and sustain operations. This comprehensive approach ensures that businesses can effectively substantiate their ERTC eligibility, providing a clear basis for IRS audits and securing necessary financial support during unprecedented times.

Understanding the ERTC and Its Complexities in Michigan

The ERTC offers significant tax relief to businesses that maintained their workforce despite experiencing financial hardship due to COVID-19. This includes a credit for a portion of wages paid to employees during certain periods of economic disruption. However, the eligibility criteria and calculation methods for the credit are intricate, involving various thresholds for revenue declines, caps on credit amounts per employee, and specific rules regarding qualifying wages. Missteps in understanding or applying these rules can lead to errors in claims, which are primary triggers for IRS audits.

The Role of a Tax Attorney in ERTC Claims

A tax attorney is crucial in navigating the complex landscape of the ERTC. Their expertise in tax law and IRS procedures can be instrumental in several ways:

Ensuring Accurate Application of the Law

Tax attorneys possess a deep understanding of tax statutes and IRS guidelines. They can interpret how these laws apply to unique aspects of a business’s operations and financial situations. This expertise is critical in determining eligibility, calculating the credit correctly, and ensuring that the claim complies with legal standards. By verifying the accuracy of the ERTC claim, a tax attorney helps minimize the risk of issues being flagged for an audit.

Strategic Documentation and Record-Keeping

Proper documentation is essential not only for filing an ERTC claim but also for defending it during an audit. A tax attorney can guide businesses in identifying and organizing the necessary documentation to support their claims. This includes payroll records, financial statements, employee health and safety records, and documentation of business disruptions due to governmental orders. A tax attorney ensures that all documentation is thorough and maintained in accordance with IRS requirements, providing a strong defense should an audit occur.

Representation During Audits

Having a tax attorney is invaluable if the IRS selects a business for an ERTC audit. They can represent the business before the IRS, handling communications and negotiations. Their legal advocacy and procedural knowledge skills enable them to navigate the audit process effectively, advocate for the business's interests, and challenge any discrepancies identified by the IRS. This representation is crucial in mitigating potential penalties or adjustments to the credit.

Maximizing the Claim

Tax attorneys can also play a strategic role in maximizing the ERTC benefit. They can advise on structuring business operations and payroll practices in ways that align with maximizing eligible credits. For example, they might recommend certain timings or methods for wage payments that comply with legal standards while benefiting from the credit’s provisions.

The laws governing the ERTC have evolved, with various legislative amendments affecting the scope and application of the credit. A tax attorney stays updated on these changes, providing clients with timely advice that aligns with the latest legal landscape. This ongoing legal consultation helps businesses adapt their practices and claims to meet current requirements, safeguarding against retroactive audits and associated liabilities.

Conclusion - Implementing a Solid ERTC Audit Defense Strategy

For Michigan businesses, the complexity of claiming the ERTC and the potential for stringent IRS audits make the involvement of a tax attorney beneficial and essential. A tax attorney enhances the business's ability to navigate the ERTC confidently, ensuring that the claims are robust, compliant, and optimally structured. This professional guidance ultimately protects the business’s financial interests, provides peace of mind, and allows business owners to focus on running their operations without the added stress of tax compliance and audit risks.

"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