Brotman Law June 27, 2024 19 min read

What to Expect During an ERTC Audit and How to Respond: For New York Businesses

The Ultimate ERTC Guide for New York Businesses

In New York, where the economy spans from the financial epicenter in Manhattan to the tech and educational hubs in upstate cities, and the extensive agricultural operations in rural areas, the Employee Retention Tax Credit (ERTC) has been instrumental during the economic turmoil caused by the COVID-19 pandemic. This federal program supports businesses that have sustained their workforces despite experiencing significant operational and financial challenges. However, accessing the ERTC also opens these businesses to potential IRS audits. For New York companies, comprehensively understanding ERTC compliance is crucial to maximize the program's benefits and manage potential audits effectively.

This guide will outline strategies for ERTC audit defense tailored to New York's diverse economic landscape, emphasizing the importance of thorough preparation and the role of legal expertise.

Understanding the ERTC in New York’s Business Environment

The ERTC provides a refundable tax credit to employers who retained staff despite significant declines in gross receipts or full or partial suspensions of their operations due to government-mandated COVID-19 restrictions. For businesses across New York, particularly those in sectors directly impacted by such disruptions, accurately documenting these impacts is essential for establishing ERTC eligibility and preparing for potential IRS audits.

New York Statewide Orders That May Have Impacted Their Business

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

  • State of Emergency Declaration (March 2020) - Governor Andrew Cuomo declared a state of emergency, enabling New York to mobilize resources and enact stringent pandemic response measures. This foundational step was crucial for businesses beginning to document operational disruptions for ERTC eligibility.

  • Mandatory Closure of Non-Essential Businesses (March 2020) - Non-essential businesses, including retail, entertainment venues, and personal care services, were required to close temporarily. This direct suspension of operations supports businesses’ claims for the ERTC as they faced government-mandated shutdowns.

  • PAUSE (Policies Assure Uniform Safety for Everyone) Executive Order (March 2020) - This order introduced strict stay-at-home instructions, significantly reducing customer traffic and impacting the ability of businesses to operate normally. This enforced reduction supports ERTC claims due to reduced operational capacity.

  • Mandatory Mask Mandate (April 2020) - New York implemented a statewide mandate requiring masks in public places, adding operational challenges for businesses in managing compliance and affecting customer interactions and potentially reducing revenues.

  • Phased Reopening Plan (May 2020) - The state introduced a phased approach to reopening, allowing businesses to resume operations gradually but with strict capacity limits and mandatory safety protocols. Despite reopening, these restrictions continued to affect business functionality and profitability, causing a partial suspension 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 Commercial Eviction and Foreclosure Moratorium (2020-2021) - This measure provided businesses with temporary relief from evictions and foreclosures, helping them preserve cash flow and maintain premises during critical periods of revenue loss.

  • Employee Sick Leave Law Related to COVID-19 (March 2020) - New legislation required businesses to provide sick leave for employees under quarantine, impacting operational and payroll strategies. This policy is relevant for ERTC claims, highlighting additional labor costs and operational adjustments.

  • Reduction in Indoor Dining Capacities (2020-2021) - Particularly impactful in urban areas like New York City, this order led to significant revenue losses for restaurants forced to operate at reduced capacity or, at times, suspend indoor dining entirely.

  • Vaccination Rollout and Impacts on Business Operations (2021) - As vaccines became widely available, businesses were encouraged to facilitate vaccinations for employees, impacting operations and potentially affecting staffing and workplace safety protocols.

Throughout the pandemic, Governor Andrew Cuomo’s administration took various measures to mitigate the spread of COVID-19 while trying to balance economic impacts. For New York businesses preparing for an Employee Retention Tax Credit 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 New York’s Economy

As the COVID-19 pandemic unfolded, its impact was felt differently across New York, challenging major sectors including the financial services in Manhattan, the tech and education sectors in Upstate New York, and agriculture in rural areas. Each region and sector faced unique disruptions that necessitated swift adaptation and strategic planning, underscoring the importance of accurate documentation for financial support measures such as the Employee Retention Tax Credit (ERTC) and IRS audits.

  • New York City: The Epicenter of Service and Hospitality Disruption. In New York City, the nation's most densely populated urban center, the hospitality and service industries faced devastating impacts due to COVID-19. With tourism halted and locals staying home, hotels, theaters, restaurants, and retail stores saw unprecedented drops in foot traffic. The city's strict lockdowns and ongoing capacity restrictions forced many businesses to shift to delivery and online operations or temporarily shut down. For those applying for the ERTC, documenting the duration of closures, modifications in business operations, and the implementation of health protocols is crucial for substantiating their claims.
  • Disruptions in Manhattan’s Financial District: Manhattan’s financial district, a global hub for banking and finance, experienced significant disruptions as firms were forced to shift to remote operations almost overnight. This transition, while necessary for health and safety, led to challenges in productivity and client interactions. The bustling trading floors and busy office meetings were replaced by virtual environments, which, while functional, lacked the immediacy and dynamism of in-person exchanges. Financial institutions had to invest heavily in secure technology infrastructures to support remote work, manage sensitive financial transactions from afar, and maintain client confidentiality under new conditions. Documenting these changes is critical for firms in the financial district; detailed records of the transition to remote work, the impact on operations, additional costs incurred, and how they managed client relations are essential for substantiating ERTC claims. These records demonstrate the efforts made to retain employees and maintain operational continuity despite significant disruptions.
  • Agricultural Challenges in Rural New York, Ithaca: Agriculture in rural New York faced its own set of challenges as farmers dealt with market volatility and supply chain disruptions. The closure of restaurants, schools, and other significant buyers of agricultural products led to an immediate impact on demand and pricing. Additionally, disruptions in transportation and logistics networks complicated the distribution of products, affecting profitability and operational efficiency. For farmers, detailed records of market changes, supply chain issues, and financial impacts are vital. Such documentation supports ERTC claims by outlining how the pandemic directly affected agricultural operations and the strategies employed to adapt and sustain the business, emphasizing the critical need to retain workers during fluctuating market conditions.
  • Buffalo: Manufacturing and Cross-Border Trade Challenges. Buffalo, known for its manufacturing sector and proximity to the Canadian border, experienced significant disruptions in production and cross-border trade. Manufacturing plants had to reduce capacity or shut down temporarily due to supply chain disruptions and reduced workforce availability due to health restrictions. The closure of the border also impacted businesses dependent on cross-border trade. Businesses in Buffalo should document these operational interruptions and their efforts to retain employees to support their ERTC claims.
  • Rochester: Technology and Education Sector Adjustments. Rochester's economy, with a strong presence in technology and educational services, faced challenges as universities like the University of Rochester and Rochester Institute of Technology paused in-person learning. Tech companies and educational institutions had to quickly transition to remote work and online learning, incurring new costs for software and online platform enhancements. For ERTC eligibility, documenting the shift to remote operations and associated costs will be vital.
  • Yonkers: Retail and Real Estate Disruptions. In Yonkers, retail businesses and real estate operations were significantly affected by pandemic-related restrictions. Retail stores had to limit customer access or move entirely to online sales, while real estate agencies saw a slowdown in transactions due to economic uncertainty and restrictions on showings. Businesses in Yonkers should maintain records of sales impacts and operational shifts, as well as how they managed to maintain their workforce, to qualify for the ERTC.
  • Syracuse: Healthcare Services and University Community Impact. Syracuse, home to Syracuse University and major healthcare facilities, saw dual challenges. Healthcare providers faced the direct impacts of handling COVID-19 cases, including reallocating staff and resources, while the university's shift to remote learning reduced economic activity typically driven by the student population. Documenting the impact of these shifts on employment and operations, along with measures taken to retain employees, will be important for Syracuse businesses claiming the ERTC.

For businesses across these sectors in New York, accurately documenting the economic impacts of the pandemic is essential. This comprehensive approach ensures that they can substantiate their ERTC eligibility, providing a clear basis for financial relief and preparing for detailed reviews by tax authorities. This detailed documentation not only supports financial recovery efforts but also prepares businesses for potential audits, ensuring they can effectively demonstrate the extent of the pandemic's impact on their operations.

Common Triggers for IRS Audits in New York

Businesses in New York might face IRS audits due to:

  • Inconsistencies in Financial Reporting: Differences between the information provided in ERTC claims and other financial or employment records can raise red flags.
  • Excessive Claims: Large claims that seem disproportionate to the business's operational impact or size may trigger further 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, New York businesses often encounter several pitfalls:

  • Misinterpreting Eligibility Criteria: Incorrectly determining 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 New York, 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, New York 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 New York

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

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Last updated: July 10, 2024

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