Brotman Law May 13, 2024 20 min read

Understanding the Landscape of New Mexico ERTC Audit Issues

Effective ERTC Audit Defense Best Practices for New Mexico Businesses

In New Mexico, diverse sectors such as energy production in Farmington, tourism in Santa Fe, and tech startups in Albuquerque have benefited significantly from the Employee Retention Tax Credit (ERTC) amid the economic challenges posed by the COVID-19 pandemic. This federal program has been instrumental in helping businesses retain employees during periods of decreased revenue or operational disruptions. However, accessing the ERTC also entails the risk of IRS audits, making it crucial for New Mexico businesses to have a robust understanding of ERTC compliance to maintain their eligibility and manage potential audits effectively.

This guide will detail the best practices for ERTC audit defense within the unique context of New Mexico’s economy, highlighting the importance of detailed preparation and the role of specialized legal expertise.

Overview of the Pandemic Related Orders and ERTC in New Mexico

The ERTC provides a refundable tax credit to employers who sustained their workforce during the pandemic under financial duress, either from significant declines in gross receipts or direct impacts from governmental COVID-related orders. Understanding the precise application of these criteria is essential for New Mexico businesses across all sectors.

New Mexico Statewide Orders That May Have Impacted Their Business

 

  • Public Health Emergency Declaration (March 2020) - Governor Michelle Lujan Grisham declared a state of public health emergency as a response to the growing threat of COVID-19. This initial step laid the groundwork for subsequent restrictions and provided the first basis for businesses to qualify for the ERTC due to impending operational disruptions.
  • Closure of Non-Essential Businesses (March 2020) - This order mandated the closure of non-essential businesses, such as retail stores, entertainment venues, and personal services. These businesses were forced to halt operations entirely, a primary condition for ERTC eligibility as it demonstrated government-mandated suspension of business activities.
  • Stay-at-Home Order (March 2020) - Residents were instructed to stay at home except for essential activities, significantly reducing customer foot traffic for all but essential businesses. This order indirectly impacted businesses' operations and revenue, supporting their claims for the ERTC by showing a partial suspension of operations.
  • Mandatory Face Coverings (May 2020) - The governor mandated face coverings in public settings, adding operational challenges for businesses required to enforce the new rule. The associated costs and potential disruptions could be considered when calculating qualified wages for the ERTC.
  • Phased Reopening Plan (Summer 2020) - New Mexico implemented a color-coded risk system dictating business operations based on current COVID-19 metrics. Although some businesses could reopen, many operated under significant restrictions (like reduced capacity), which could qualify them for ERTC due to partial suspension.
  • Temporary Re-closure of Indoor Dining (July 2020) - Due to a spike in cases, indoor dining was suspended again after a brief reopening. Restaurants faced roller-coaster operational statuses, qualifying for ERTC as these closures directly impacted their ability to conduct business normally.
  • Extended Unemployment Benefits (2020) - With this extension, some businesses struggled to bring back employees, affecting their operational capacity. This is crucial for the ERTC, as it underscores the challenges in maintaining a workforce despite ongoing financial distress.
  • Expansion of Capacity Limits (2021) - As vaccine distribution increased and cases started to decline, capacity limits for businesses were gradually increased. The slow return to normal capacity still posed financial challenges, relevant for ERTC claims covering periods when businesses were not fully operational.
  • Financial Assistance Programs for Small Businesses (Throughout 2020 and 2021) - The state launched several grants and loan programs to support small businesses, indicating recognition of the severe impacts of COVID-19 on business operations. Participation in these programs can demonstrate the financial impact and need for support, important for justifying ERTC claims.
  • Lifting of Most Restrictions (July 2021) - When most restrictions were lifted, businesses still faced challenges in ramping up operations and dealing with the economic aftermath. The lingering effects such as reduced consumer spending and continued caution could justify ERTC claims for the earlier periods of significant disruption.

Throughout the pandemic, Governor Michelle Lujan Grisham's administration implemented a range of measures aimed at balancing public health with economic impacts.

For New Mexico businesses preparing for an Employee Retention Tax Credit Audit, documenting how each state order affected their operations is crucial. They should maintain detailed records of the timeline of restrictions, the specific operational limitations imposed, financial impacts, and their efforts to retain employees under challenging conditions. This documentation will be key in demonstrating the necessity of the ERTC during the periods of enforced restrictions and gradual recovery.

Impact of COVID-19 on New Mexico's Economy

In New Mexico, the economic impacts of COVID-19 painted a diverse picture across different cities, each shaped by its unique industrial landscape. Albuquerque, Santa Fe, and Farmington experienced distinct challenges due to the pandemic, which are crucial for understanding and documenting in the context of the Employee Retention Tax Credit (ERTC) and preparing for potential IRS audits.

  • Albuquerque, known for its burgeoning tech and research sectors, faced a significant shift as the pandemic accelerated the transition to remote work. This city, home to numerous tech startups and research institutions, including branches of national laboratories, saw a drastic change in how businesses operate. While some companies benefited from the flexibility of remote setups, others struggled with disruptions in collaborative projects and innovation processes that traditionally relied on in-person interaction. This shift not only affected the tech companies but also the local businesses that serviced them, such as cafes, restaurants, and real estate firms specializing in office spaces. These businesses saw a decline in daily clientele, impacting their revenue streams profoundly. Documenting these shifts is essential for claiming the ERTC, as businesses must illustrate how the transition to remote work or the reduction in operations has led to sustained financial challenges.
  • Albuquerque: Tourism and Cultural Events Disruption - Additionally, Albuquerque is a city renowned for its annual International Balloon Fiesta and other cultural events, saw a significant decline in tourism due to pandemic-related restrictions. The cancellation of major events and the subsequent drop in tourists affected hotels, restaurants, and local arts and crafts businesses that thrive on the influx of visitors. Many of these businesses had to shift to virtual event offerings and enhance their local delivery and takeout services to cope with the lost revenue. For ERTC claims, these businesses should document the specific event cancellations, the decrease in tourism, and the adaptation measures implemented to maintain operations and retain employees.
  • Santa Fe, with its economy deeply intertwined with the arts and tourism, experienced severe repercussions from the pandemic. Known for its vibrant art scenes, cultural festivals, and historic sites, Santa Fe relies heavily on tourist dollars to fuel its local businesses, from galleries and museums to hotels and restaurants. The travel restrictions and the overall decline in tourism during the pandemic resulted in a stark decrease in visitor numbers, devastating the local economy. The businesses most affected needed to adapt swiftly, often shifting to online sales platforms or reducing operational hours to survive. For ERTC eligibility, businesses in Santa Fe need to provide detailed accounts of how reduced tourism has directly impacted their operations and financial health, emphasizing the prolonged nature of these impacts.

    Las Cruces: Education Sector and Ancillary Businesses Impact - Las Cruces, home to New Mexico State University, faced challenges as the university shifted to remote learning. This greatly affected local businesses that depend on the student population, such as cafes, bookstores, and rental housing. The reduced foot traffic and a shift in consumer behavior led to a sharp decline in revenue, forcing businesses to adapt by offering online sales, curbside pickup, and special promotions targeted at local residents. Documentation for ERTC claims should include details on the reduction in student presence, adjustments in business operations, and efforts to keep employees on the payroll.

    Rio Rancho: Manufacturing and Supply Chain Disruptions - Rio Rancho's manufacturing sector, particularly electronics and industrial equipment, experienced disruptions due to supply chain issues and mandatory safety measures that reduced operational capacity. Factories had to slow down production or temporarily halt operations to comply with social distancing mandates, impacting their output and financial stability. Manufacturing businesses should maintain records of production delays, employee retention efforts during shutdowns, and any financial aid used to support payroll to substantiate their ERTC claims.

  • Farmington, a city whose economy is significantly supported by the energy sector, faced its set of challenges as the global energy markets became volatile and regulatory pressures increased. Businesses in Farmington, particularly those in the oil and gas industries, had to navigate not only the fluctuating prices and demand but also new health and safety regulations that added layers of complexity to their operations. These factors led to operational disruptions, layoffs, and in some cases, complete halts in production. For these businesses, the ERTC claims must clearly link these market and regulatory challenges to the necessity to retain employees amidst financial strain.

For businesses in Albuquerque, Santa Fe, and Farmington, the narrative of economic disruption during the pandemic is complex and multifaceted. Successfully documenting these impacts for the ERTC involves not just detailing the financial losses but also the operational hurdles and strategic responses to an unprecedented global crisis.

This documentation will prove crucial during IRS audits, demonstrating the direct link between COVID-19 impacts and the efforts made by businesses to maintain their workforce and stabilize amidst ongoing uncertainty. This comprehensive approach will help substantiate their claims for the Employee Retention Tax Credit, ensuring they receive the necessary support to aid in their recovery.

The ERTC, introduced under the CARES Act and subsequently modified by later legislation, including the Consolidated Appropriations Act and the American Rescue Plan Act, offers a refundable tax credit to employers. This credit is aimed at businesses that have sustained financial disruptions due to COVID-19 and continued to pay employees despite operational difficulties.

Legally, the credit applies to wages paid after March 12, 2020, and before October 1, 2021. To qualify, businesses must either experience a full or partial suspension of operations due to government COVID-19 orders or a significant decline in gross receipts compared to 2019.

Compliance Issues: The main legal challenge in an ERTC audit revolves around compliance. Businesses must demonstrate adherence to the IRS's evolving guidelines on what constitutes eligible wages, qualifying employees, and permissible operational disruptions. Misinterpretation of these guidelines can lead to non-compliance, flagged during an audit.

Documentation Failures: From a legal perspective, inadequate documentation is a critical risk. The IRS requires comprehensive evidence supporting the ERTC claim, including payroll records, accounting data, and proof of COVID-19 impact. Failure to maintain or present complete documentation can lead to the denial of the credit.

Fraud and Penalties: In cases where the IRS suspects fraud—such as claiming the credit for non-qualifying wages or inflating payroll figures—the consequences can be severe. Penalties may include fines, repayment of the credit with interest, and in extreme cases, criminal charges.

Document Everything:  Ensure that all financial records, HR documents, and communications detailing operational decisions during the pandemic are well-documented and easily accessible. This includes detailed ledgers of wages paid, employee rosters, hours worked, and correspondence about business operations related to COVID-19 restrictions.

Understand Your Eligibility: Constantly review IRS updates and guidelines regarding ERTC eligibility. Consulting with a tax professional or attorney can provide clarity and ensure that your understanding aligns with the latest legal standards.

Maintain Transparency: If audited, be transparent with the IRS about your business operations and how decisions were made during the pandemic. Full disclosure can mitigate potential penalties and establish good faith in your business practices.

Why Engage a Tax Attorney

Expert Guidance: Tax attorneys specialize in the intricacies of tax law and can provide authoritative advice on navigating the complex requirements of the ERTC. They can help interpret IRS guidelines and apply them accurately to your business’s specific circumstances.

Audit Representation: A tax attorney can represent your business during an audit, handling negotiations and communications with the IRS. Their expertise can be invaluable in presenting a strong case for your ERTC claim and addressing any issues that arise during the audit.

Strategic Planning: Beyond the immediate needs of an audit, a tax attorney can assist in strategic planning to ensure ongoing compliance and optimize tax benefits. This includes planning for potential legislative changes and understanding their implications for your business.

Dispute Resolution: If disputes arise from the audit, a tax attorney can guide you through the resolution process, whether it involves administrative appeals or litigation. Their legal expertise is crucial in protecting your interests and securing a favorable outcome.

Conclusion: Safeguarding ERTC Benefits in New Mexico

For businesses throughout New Mexico, effectively managing ERTC claims involves more than just fulfilling eligibility requirements—it requires comprehensive planning, thorough documentation, and a proactive approach to potential audits. By leveraging specialized legal expertise and maintaining rigorous compliance practices, New Mexico businesses can confidently navigate the complexities of ERTC audits and secure essential financial benefits to support ongoing operations and growth in the state'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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