Brotman Law June 27, 2024 20 min read

ERTC Audits: How to Prepare and Protect Your Missouri Business

How Missouri Businesses Can Prepare For ERTC Audits 

In Missouri, a state with a diverse economic landscape that includes significant sectors like agriculture in the rural areas, automotive manufacturing in Kansas City, and biotechnology in St. Louis, the Employee Retention Tax Credit (ERTC) has played a crucial role in helping businesses maintain employment during the economic uncertainty caused by the COVID-19 pandemic. However, while the ERTC offers substantial financial benefits, it also brings the possibility of IRS audits. Understanding the nuances of ERTC compliance is essential for Missouri businesses to maximize their benefits from the program and navigate potential audits successfully.

This guide will detail strategies for ERTC audit defense appropriate for Missouri's varied economic sectors, emphasizing the importance of meticulous preparation and the essential role of professional legal advice in managing these challenges.

Understanding the ERTC in Missouri's Economic Context

The ERTC offers a refundable tax credit to employers who kept staff on payroll during significant financial hardships due to either considerable declines in gross receipts or government-mandated operational suspensions related to COVID-19.

Missouri Statewide Orders That May Have Impacted Their Business

Here’s a summary of ten significant COVID-19 orders in Missouri during 2020 and 2021 under Governor Mike Parson that impacted businesses, with a focus on how these directives relate to the Employee Retention Tax Credit (ERTC) Audit.

Here’s a summary of ten significant COVID-19 orders in Missouri during 2020 and 2021 under Governor Mike Parson that impacted businesses, with a focus on how these directives relate to the Employee Retention Tax Credit (ERTC) Audit.

  • State of Emergency Declaration (March 2020) - Governor Mike Parson declared a state of emergency, which enabled the mobilization of state resources and set the stage for subsequent restrictions. For businesses, this marked the beginning of a period of significant operational uncertainty, foundational for establishing ERTC claims.

  • Stay-at-Home Order (April 2020) - This order required Missourians to stay home unless engaging in essential activities. Businesses not deemed essential had to close or shift to remote operations, which significantly disrupted normal operations and revenue streams, aligning them with ERTC eligibility criteria.

  • Phased Reopening (May 2020) - Missouri implemented a phased approach to reopening, allowing businesses to resume operations under strict health and safety guidelines. Even as businesses reopened, capacity limits and social distancing requirements continued to impact their operational efficiency and profitability, relevant for ERTC audits.

  • No Statewide Mask Mandate, Local Mandates Vary (2020-2021) - Unlike many states, Missouri did not enact a statewide mask mandate; however, local governments implemented their own. Businesses had to navigate varying local regulations, which affected customer interactions and compliance costs, impacting ERTC eligibility by altering normal business operations.

  • Expansion of Unemployment Benefits (2020) - Extended unemployment benefits were made available, impacting businesses’ ability to rehire staff as some employees might have chosen to remain on unemployment. Documenting these workforce challenges is crucial for supporting ERTC claims.

  • Limitations on Large Gatherings (Throughout 2020 and 2021) - Restrictions on large gatherings affected businesses reliant on event-based revenue, such as venues and event organizers, supporting their eligibility for the ERTC due to enforced limitations on operational capacity.

  • Financial Assistance for Businesses (2020-2021) - The state offered various financial aid programs to support struggling businesses. Participating in these programs highlights the financial impact experienced, which is essential for substantiating ERTC claims.

  • Guidelines for Safe Operations (Ongoing from 2020) - Businesses were provided with guidelines to operate safely. The costs incurred from implementing these health and safety measures can be factored into ERTC calculations, as they directly impacted business operations.

  • End of Statewide Public Health Restrictions (June 2021) - Governor Parson announced the end of all statewide public health restrictions, allowing businesses to operate without these limitations. However, the residual economic impacts continued to affect businesses, justifying ERTC claims for earlier periods of significant disruption.

  • Emergency Federal Funds Allocation (2021) - The utilization of emergency federal funds to support various sectors, including business, highlights the ongoing economic challenges. Businesses that received this support must maintain thorough records of how these funds were used to sustain operations and retain staff, which are pertinent to ERTC audits.

Throughout 2020 and 2021, Governor Mike Parson's administration navigated the challenge of balancing economic impacts with public health needs. For Missouri businesses preparing for an Employee Retention Tax Credit Audit, it is critical to document how each state order and the broader economic environment affected their operations. Detailed records should include timelines 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 Missouri’s Economy

During the COVID-19 pandemic, Missouri faced a multitude of challenges that varied significantly across its major urban centers and rural areas. Each region dealt with its unique set of obstacles, heavily influenced by the dominant industries within those areas. From Kansas City’s manufacturing sectors to St. Louis’s healthcare and biotech industries, and the agricultural challenges in rural Missouri, the economic impacts were profound. Documenting these impacts accurately is crucial for businesses to substantiate Employee Retention Tax Credit (ERTC) eligibility and to prepare effectively for potential IRS audits.

  • Kansas City: Manufacturing Disruptions: In Kansas City, a significant hub for manufacturing, particularly in the automotive sector, businesses encountered severe disruptions. The onset of the pandemic led to a dramatic slowdown in global supply chains, affecting the availability of essential components for automotive manufacturing. This disruption was compounded by a temporary cessation of operations following government-mandated closures and safety measures, which led to substantial production delays and financial losses. Many manufacturers had to furlough employees or significantly reduce their working hours. The ability of these businesses to bounce back was heavily dependent on stabilizing supply chains and reviving consumer demand. For these businesses, documenting the direct impact of these disruptions, including detailed timelines and financial data, is essential to justify claims for the ERTC, highlighting how significantly and directly the pandemic affected their operations.
  • St. Louis: Healthcare and Biotech Fluctuations: St. Louis, known for its robust healthcare and biotechnology sectors, experienced a dichotomy of impacts due to the pandemic. On one hand, there was a surge in demand for medical services and biotechnological research related to COVID-19, which led to increased production and sometimes even expansion in certain facilities. On the other hand, many non-COVID-related medical practices and biotech firms faced significant disruptions. Resources often had to be reallocated to pandemic-related services, and many routine procedures and research projects were postponed or scaled down, causing revenue losses and operational challenges. Businesses in these sectors need to detail both the surge in demand and the disruptions experienced, outlining how these factors necessitated maintaining staff levels despite the pandemic's challenges, a critical element in securing ERTC benefits.
  • Sedalia, Rural Missouri: Agricultural Volatility: The agricultural sector in rural Missouri was not spared by the pandemic’s far-reaching effects. Farmers and agribusinesses faced significant issues related to disrupted supply chains and fluctuating demand from markets and food processors. The closure of many restaurants and the shift in consumer purchasing behaviors led to an unpredictable market, significantly impacting revenue streams. Moreover, disruptions in obtaining necessary farm supplies hampered planting and harvesting operations, further straining the agricultural economy. For these businesses, compiling comprehensive records of how supply chain disruptions and demand fluctuations impacted their operations is vital. These records will support their ERTC claims, demonstrating the critical need for employee retention during periods of decreased production and financial instability.
  • Springfield: Health and Wellness Sector Disruptions. Springfield, known for its robust healthcare system, faced unique challenges as medical facilities had to postpone non-essential procedures to focus resources on COVID-19 cases. This shift significantly affected the financial stability of private practices, dental offices, and elective surgery centers. To maintain operations, many of these facilities implemented telehealth services and adjusted staffing levels to cope with the reduced in-person visits. For ERTC claims, these businesses should document the shift to telehealth, changes in service offerings, periods of reduced operations, and efforts to retain healthcare staff.
  • Columbia: University and Student-Dependent Business Impact. Columbia, home to the University of Missouri, saw significant disruptions when the university initially moved to remote learning. Local businesses that typically serve the student population, such as bookstores, restaurants, bars, and apartment rentals, experienced a drastic downturn. Many adapted by enhancing online sales platforms or modifying their services to cater to local residents and carry-out orders. For ERTC claims, documenting the direct impact of the university's closure, adaptation measures, and how these efforts helped maintain employment levels is essential.
  • Independence: Retail and Historical Tourism Decline. Independence, with its rich historical attractions, faced declines in tourism which severely impacted local museums, tour operators, and retail businesses. Many of these entities had to close temporarily or operate at significantly reduced capacity, leading to a drop in revenue. Retail businesses particularly suffered from reduced foot traffic in historical districts. They adapted by increasing online sales and offering local delivery services. Documentation for ERTC claims should include records of shutdown periods, adaptation to online platforms, and employee retention efforts.
  • Lee's Summit: Construction and Real Estate Slowdown. In Lee's Summit, the construction and real estate sectors experienced delays and disruptions due to social distancing measures and economic uncertainty. Projects were postponed or canceled, impacting revenues for businesses in these sectors. Many construction firms had to reduce hours or retain employees at reduced wages to keep their workforce engaged. For ERTC claims, construction businesses should maintain detailed records of project delays, financial impacts, and measures taken to avoid layoffs.
  • O'Fallon: Service Industry Hardships. O'Fallon, a rapidly growing suburb, saw its burgeoning service industry hit hard by mandatory dining and service restrictions. Restaurants, cafes, and personal services such as salons and fitness centers either shut down or operated under stringent capacity limits, leading to significant revenue losses. Many of these businesses shifted to online appointment systems, curbside pickup, and home delivery services to survive. For ERTC claims, it's crucial to document the duration and extent of closures, pivot to digital services, and strategies employed to retain employees during restricted operations.

For Missouri businesses in these cities, meticulous documentation of how pandemic-related restrictions affected operations, financial health, and workforce retention is crucial. This information not only supports their ERTC claims but also prepares them for potential IRS audits by providing clear evidence of the necessity for financial support through the tax credit program.

Common Triggers for IRS Audits in Missouri

Missouri businesses may encounter IRS audits due to:

  • Inconsistencies in Application Data: Differences between ERTC claims and other financial or payroll information.
  • Unusually Large Claims: Claims that appear disproportionate to the business's size or the economic impact described.
  • Random Audits: Part of the IRS’s routine efforts to ensure compliance across all sectors.

Avoiding Common Mistakes in ERTC Claims

When applying for the ERTC, Missouri businesses often face pitfalls such as:

  • Misinterpreting Eligibility: Incorrectly assessing what qualifies as a significant operational disruption or substantial decline in gross receipts.
  • Insufficient Documentation: Not maintaining detailed records that substantiate the impact of COVID-19 on business operations and payroll.
  • Calculation Errors: Mistakes in determining the eligible amount for the tax credit due to complexities in payroll data or misapplication of IRS guidelines.

Essential Documentation for ERTC Audit Defense

To effectively defend against an ERTC audit, Missouri businesses should have:

  • Detailed Payroll Records: Showing continuity of employment and levels of compensation.
  • Comprehensive Financial Statements: Demonstrating clear links between the pandemic and business revenue declines.
  • Documentation of Compliance: Evidence of adherence to federal and state COVID-19 related regulations impacting operations.

Role of Tax Attorneys in ERTC Audit Processes

In Missouri, tax attorneys are invaluable in navigating ERTC audits by providing:

  • Expert Legal Guidance: Clarifying complex ERTC regulations and their application to specific business scenarios.
  • Audit Preparation Assistance: Helping organize and review documentation to ensure it supports the ERTC claim comprehensively.
  • Representation During Audits: Managing communications with the IRS to ensure the business’s interests are effectively represented and disputes are resolved favorably.

Proactive Audit Preparation Strategies

To minimize audit risks and ensure readiness, Missouri businesses should implement several proactive measures:

  • Regular Review of Documentation: Maintaining all ERTC-related documents to ensure they are accurate and complete.
  • Continuous Legal and Financial Consultation: Staying updated on legislative changes affecting the ERTC and IRS auditing practices through ongoing consultations with tax professionals.
  • Mock Audit Simulations: Conducting internal or third-party audits to identify any potential issues before the IRS does.

Building a Compliance-Focused Corporate Culture

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

Conclusion: Securing Long-Term Benefits from the ERTC in Missouri

For businesses across Missouri, 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, Missouri businesses can confidently navigate the complexities of ERTC audits and ensure continued financial stability and growth in the state’s dynamic economic environment.

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-Aileen Dwight, Licensed Clinical Social Worker & Psychotherapist

Last updated: July 10, 2024

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