Brotman Law May 13, 2024 20 min read

Navigating Ohio Employee Retention Tax Credit Audits

How Ohio Businesses Can Get Strategic in Their ERTC Audit Defense

In Ohio, where the economy is bolstered by diverse sectors including manufacturing in Cleveland, finance and healthcare in Columbus, and agriculture throughout the rural areas, the Employee Retention Tax Credit (ERTC) has been a critical financial aid during the economic turbulence caused by the COVID-19 pandemic. This federal program supports businesses that have managed to retain their workforce despite facing significant operational and financial challenges. However, taking advantage of the ERTC also means that businesses are subject to potential IRS audits. For Ohio enterprises, understanding the intricacies of ERTC compliance is crucial to maximize the program's benefits and handle audits effectively.

This guide will outline effective strategies for ERTC audit defense in Ohio, emphasizing the importance of diligent preparation and the role of legal expertise.

Overview of the ERTC in Ohio's Economic Context

The ERTC offers a refundable tax credit to employers who retained employees despite experiencing significant declines in gross receipts or undergoing full or partial suspensions of their business operations due to government-mandated COVID-19 restrictions. For businesses across Ohio, particularly those impacted by disruptions in manufacturing supply chains or changes in consumer behavior, documenting these impacts is crucial.

Ohio COVID-19 Statewide Orders That May Have Impacted ERTC Eligibility

  • State of Emergency Declaration (March 2020) - Governor Mike DeWine declared a state of emergency, which enabled the state government to take swift action to address the pandemic. This foundational measure allowed for significant regulatory flexibility and set the stage for financial support measures, crucial for businesses beginning to assess disruptions for ERTC eligibility.

  • Closure of Non-Essential Businesses (March 2020) - Following national trends, Ohio mandated the closure of non-essential businesses such as retail stores, entertainment venues, and dine-in restaurants. These closures had a profound impact on their operations and revenue, establishing a clear basis for ERTC claims due to government-mandated suspension of operations.

  • Stay-at-Home Order (March 2020) - This extensive order required all Ohioans to stay at home unless for essential activities, drastically reducing customer traffic and affecting businesses’ ability to operate normally. This supported ERTC claims by showing forced reductions in operational capacity.

  • Mandatory Mask Mandate (July 2020) - Ohio introduced a statewide mask mandate, requiring face coverings in public spaces. Businesses had to enforce this new rule, which could affect customer behavior and operations, adding an operational challenge relevant to ERTC claims.

  • Phased Reopening Plan (May 2020) - The state implemented a phased approach to reopening, allowing businesses to resume operations under strict guidelines, including capacity limits and mandatory safety protocols. Even as businesses reopened, these continued restrictions qualified them for the ERTC due to partial suspensions of normal operations.

  • Curfew Imposed (November 2020) - A statewide curfew was enacted to curb the spread of the virus, limiting hours of operation for businesses, particularly those in the hospitality sector. This curfew further substantiated ERTC claims by limiting operational hours and impacting revenue.

  • Ban on Large Gatherings (Ongoing from 2020 into 2021) - Restrictions on large gatherings continued to affect venues and businesses reliant on such events, reinforcing their ERTC claims due to restricted operational capacity and direct impacts on revenue.

  • Extension of Unemployment Benefits (2020) - Enhanced unemployment benefits were extended, impacting businesses’ workforce decisions and capabilities, particularly as some employees may have opted to remain on unemployment due to increased benefits.

  • Temporary Prohibition of Shut-off for Utility Services (2020) - This order helped businesses manage operational costs by preventing utility shut-offs, indirectly supporting cash flow during revenue downturns.

  • Financial Assistance and Relief Programs (2020-2021) - Ohio rolled out several financial assistance programs aimed at supporting businesses facing economic distress. Participation in these programs underscores the financial impact experienced, supporting ERTC documentation by illustrating the need for additional support to maintain operations and staff.

Throughout the pandemic, Governor Mike DeWine’s administration implemented various measures aimed at balancing public health with economic impacts. For Ohio businesses preparing for an Employee Retention Tax Credit Audit, documenting how each state order affected their operations, financial health, and employment practices is essential.

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.

Local Impact of COVID-19 on Ohio’s Economy

As the COVID-19 pandemic swept through Ohio, it profoundly impacted various regions and industries, from the manufacturing powerhouses in Cleveland to the diverse economic sectors in Columbus and the agricultural communities in rural Ohio. Each area experienced unique challenges, highlighting the importance of documenting these impacts accurately for purposes such as substantiating Employee Retention Tax Credit (ERTC) eligibility and preparing for IRS audits.

  • Cleveland - Manufacturing Disruptions: Cleveland, known for its robust manufacturing base, particularly in the automotive and steel industries, faced significant disruptions due to the pandemic. The onset of COVID-19 led to abrupt halts in production as factories closed to mitigate the spread of the virus, adhering to state and local government mandates. Supply chains were also severely disrupted; delays in the delivery of raw materials and components became commonplace as global supply networks ground to a halt. These challenges not only paused production but also led to financial strains as inventory levels fluctuated and workforce management became a logistical challenge. For businesses in Cleveland, documenting these disruptions is crucial. Details such as the length of shutdowns, the specifics of supply chain interruptions, and the efforts to mitigate impacts on employees are essential for demonstrating how the pandemic necessitated retaining staff despite reduced operations, a key factor in qualifying for the ERTC.
  • Columbus - Mixed Economic Impacts: In Columbus, the economic impact of the pandemic was distinctly uneven across its key sectors—financial services and healthcare. While the healthcare sector experienced a surge in demand due to the health crisis, necessitating rapid expansions and increased staffing levels, the financial services sector faced a different reality. With the economic downturn, consumer spending and investment decreased, though demand for certain services like mortgage refinancing increased due to low-interest rates. Financial institutions had to quickly adapt to a remote work model, which introduced new challenges in cybersecurity and customer service. Documenting these sector-specific impacts, including changes in service demand and the operational shift to remote work, is vital for businesses in Columbus. This information supports ERTC claims by outlining the adaptations necessary to continue operations and maintain employment levels during the pandemic.
  • Rural Ohio - Agricultural Volatility: For the agricultural sector in rural Ohio, the pandemic introduced significant market volatility and distribution challenges. Farmers faced unpredictable shifts in demand as traditional markets such as restaurants and schools reduced orders or closed, forcing many to find alternative sales channels or face perishable stock losses. Additionally, disruptions in distribution networks due to logistic restrictions compounded these challenges, affecting the ability to get products to market efficiently. For these agricultural businesses, detailed records of how demand fluctuations and distribution issues impacted their revenue and operations are critical. This documentation is necessary to substantiate ERTC eligibility, illustrating the direct effects of the pandemic on their business stability and the strategic efforts to maintain a viable workforce.

For Ohio businesses across these diverse regions, the narrative of navigating the pandemic involves considerable adaptation, resilience, and strategic decision-making. Precise documentation of the 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 financial relief and preparation for IRS audits.

Common Triggers for IRS Audits in Ohio

As the Employee Retention Tax Credit (ERTC) program continues to provide financial relief to businesses affected by the COVID-19 pandemic, the Internal Revenue Service (IRS) is ramping up its audit activities to ensure compliance with the complex criteria of the program. Ohio businesses that have claimed the ERTC must be prepared for increased scrutiny and understand how these audits are conducted to protect their claims effectively. Engaging a skilled tax attorney is crucial for navigating through the intricacies of an IRS audit.

Understanding the IRS Audit Focus for ERTC Claims

The IRS is particularly vigilant about how businesses in Ohio and elsewhere have applied for and utilized the ERTC. Audits are focused on verifying that businesses meet eligibility requirements, such as experiencing a significant decline in gross receipts or being subject to full or partial suspension of operations due to government orders. The IRS also scrutinizes the accuracy of the wage amounts claimed and ensures that no double-dipping occurs if the business also received Paycheck Protection Program (PPP) loans or other credits.

Common Areas of Scrutiny in ERTC Audits

  • Eligibility Verification: The IRS first checks whether the business truly faced operational disruptions or financial declines that qualify them for the ERTC. This involves a detailed examination of financial records and timelines of disruptions.
  • Wage and Employee Count Accuracy: Auditors review payroll records to confirm that the claimed credit amounts correspond to eligible wages paid to employees. They also verify that employee counts are accurate and that the business did not claim more credit than allowed per employee.
  • Documentation and Record-Keeping: Proper documentation is key. The IRS expects businesses to provide comprehensive records, including payroll reports, tax filings, and operational records, to substantiate their claims.

Strategies for Ohio Businesses to Protect Themselves in Audits

Maintain Rigorous Documentation

Businesses should keep detailed and organized records that support every aspect of their ERTC claim. This includes documenting the impact of COVID-19 on operations, maintaining accurate and complete payroll records, and keeping all communications regarding the ERTC application and calculations. Documentation should be ready to present at a moment’s notice in case of an IRS audit.

Understand the Interplay with Other Programs

Businesses that have availed themselves of multiple relief measures need to carefully navigate the requirements to prevent issues of non-compliance, particularly with regard to the intersection of PPP and ERTC. Legal guidance can help ensure that claims do not overlap improperly and that the maximization of one benefit does not invalidate another.

Conduct Self-Audits

Proactively conducting internal reviews or mock audits can help identify potential red flags before the IRS does. These self-audits should mimic the IRS's auditing processes to prepare the business for what to expect and help uncover any discrepancies in their claims or documentation.

Develop a Comprehensive Response Strategy

Having a strategy in place for responding to IRS inquiries can greatly improve a business’s ability to handle an audit efficiently. This should include designated personnel who understand the ERTC process thoroughly, and protocols for compiling and providing information to the IRS promptly and accurately.

Regular reviews of ERTC claims by a tax professional or attorney can provide an additional layer of security by ensuring ongoing compliance with evolving IRS guidelines and tax law changes.

The Role of a Tax Attorney in Navigating ERTC Audits

A tax attorney is invaluable in guiding Ohio businesses through the complexities of an IRS audit for several reasons:

  • Expertise in Tax Law: Tax attorneys have deep knowledge of tax law, including recent changes related to pandemic relief measures. They can interpret complex regulations and provide clear guidance.
  • Audit Representation: An attorney can represent the business during audit proceedings, handling communications with the IRS, advocating on the business's behalf, and negotiating any disputes that arise.
  • Strategic Planning: Tax attorneys help businesses plan and execute strategies that not only address current compliance but also prepare them for potential future audits.
  • Peace of Mind: Perhaps most importantly, having a seasoned tax attorney handle the intricacies of an IRS audit can provide business owners with peace of mind, allowing them to focus on running their business rather than on tax compliance issues.

Ohio businesses can significantly benefit from the counsel of a tax attorney to navigate ERTC audits successfully. With their expertise, businesses can ensure that their ERTC claims stand up to IRS scrutiny while optimizing their financial and operational strategies to continue thriving in a challenging economic landscape.

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

For businesses across Ohio, 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 Ohio’s diverse economic environment.

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Last updated: May 18, 2024

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