Brotman Law June 27, 2024 20 min read

The Ultimate Guide to ERTC Audit Defense for Oklahoma Businesses

Learn How Your Business Can Protect Itself In An ERTC Audit 

In Oklahoma, where the economy is bolstered by sectors such as energy in Tulsa, agriculture across the state, and a burgeoning biotech industry in Oklahoma City, the Employee Retention Tax Credit (ERTC) has served as a critical financial support during the COVID-19 pandemic. This federal program aids businesses that have maintained their workforce despite facing significant economic hardships. However, the benefits of the ERTC come with the oversight of potential IRS audits. For Oklahoma businesses, understanding the complexities of ERTC compliance is crucial to ensure they continue to benefit from the program and effectively handle any audits.

This guide will outline detailed strategies for ERTC audit defense, tailored to the diverse economic backdrop of Oklahoma, emphasizing the importance of diligent preparation and the critical role of legal expertise.

Overview of the ERTC in Oklahoma

The ERTC provides a refundable tax credit to employers who retained employees during times of financial hardship due to significant declines in gross receipts or due to full or partial suspensions of their business operations as mandated by governmental COVID-related orders.

Oklahoma Statewide Orders That May Have Impacted Their Business

Here's a detailed summary of ten significant COVID-19 orders in Oklahoma during 2020 and 2021, under Governor Kevin Stitt, and how these orders impacted businesses, especially in the context of the Employee Retention Tax Credit (ERTC) Audit.

  • State of Emergency Declaration (March 2020) - Governor Kevin Stitt declared a state of emergency. This foundational decree marked the beginning of statewide restrictions, allowing businesses to start documenting disruptions and financial impacts for ERTC eligibility due to the onset of operational disturbances.

  • Closure of Non-Essential Businesses (March 2020) - Non-essential businesses in heavily affected counties were ordered to close, directly halting their operations. This mandate was a key factor in qualifying for the ERTC as businesses were forced to suspend operations entirely or significantly reduce their scope.

  • Safer-at-Home Order for Vulnerable Populations (March 2020) - This order targeted individuals over 65 and those with serious underlying medical conditions, reducing consumer traffic significantly. Businesses reliant on this demographic faced particular challenges, impacting revenue and supporting their ERTC claims due to decreased customer base.

  • Mandatory 14-Day Quarantine for Travelers (April 2020) - Travelers from areas with significant community spread were required to quarantine upon entering Oklahoma, which impacted businesses related to travel and tourism. This measure further qualified businesses for ERTC by demonstrating how state orders directly diminished their operational capacity and market.

  • Phased Reopening Plan (May 2020) - As Oklahoma initiated a phased reopening, businesses could operate but under strict safety protocols and capacity limits. Despite reopening, the lingering effects of capacity restrictions continued to affect business operations, justifying ongoing ERTC claims.

  • Mask Mandate in State Buildings (July 2020) - A mask mandate was imposed in all state-owned buildings, influencing businesses that operate within or supply these facilities. Compliance costs and operational disruptions due to this mandate could be accounted for in ERTC applications.

  • Extension of State of Emergency (Multiple times in 2020 and 2021) - The repeated extensions of the state of emergency underscored the continuing impact of the pandemic, reinforcing the need for ongoing documentation of business disruptions for ERTC eligibility.

  • Temporary Ban on Elective Surgeries (December 2020) - This order was reinstated to preserve medical resources, affecting medical practices and related businesses. The financial impact of such healthcare restrictions supports claims for the ERTC, as these businesses experienced operational disruptions.

  • Launch of Small Business Relief Funding (2020) - Oklahoma provided financial assistance to small businesses, acknowledging the severe economic impacts faced. Businesses applying for these funds can use their applications as proof of hardship and disruption in ERTC audits.

  • Vaccination Rollout and Business Adjustments (2021) - As vaccines became available, businesses had to adjust operations to manage vaccination statuses of employees and comply with ongoing health recommendations. The costs and complexities of these adjustments are relevant to ERTC claims.

Throughout 2020 and 2021, Governor Kevin Stitt’s administration's response to the pandemic involved a balance of restrictive and supportive measures, aiming to mitigate public health risks while considering economic impacts. For Oklahoma businesses preparing for an Employee Retention Tax Credit Audit, detailed documentation of how each state order affected their operations is crucial. 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 vital in demonstrating the necessity of the ERTC during periods of significant operational disruption and recovery.

COVID-19 Impact on Key Oklahoma Sectors

The COVID-19 pandemic has had a profound impact on various regions of Oklahoma, each facing unique economic challenges that have reshaped their industries and affected their operational dynamics. Tulsa, Oklahoma City, and the rural areas of the state have each navigated these turbulent times, with their businesses experiencing significant disruptions that are crucial to document for establishing Employee Retention Tax Credit (ERTC) eligibility and preparing for potential IRS audits.

  • Tulsa's Energy Sector Challenges: In Tulsa, the city's robust energy sector felt the sharp sting of the pandemic's economic impact. Known as a vital hub for oil and energy companies, Tulsa experienced dramatic fluctuations in oil prices and a significant reduction in global demand. This volatility not only destabilized market conditions but also led to scaled-back operations, delayed projects, and, in some cases, significant layoffs. The ripple effects of these market changes extended to ancillary businesses, including service companies and suppliers, which faced their own set of challenges as contracts dwindled and payment delays became commonplace. Documenting these impacts, from operational cutbacks to financial losses, is critical for businesses in Tulsa. This data substantiates their ERTC claims by showing how deeply the pandemic has affected their stability and profitability.
  • Shifts in Oklahoma City's Biotech and Health Industries: Oklahoma City, a burgeoning center for biotech and health-related industries, experienced shifts in operational demands that varied widely across sectors. While some companies in the health sector saw an increase in demand due to the pandemic—ranging from pharmaceuticals to medical equipment manufacturers—others faced significant disruptions. For instance, non-essential medical services experienced shutdowns or severe reductions in patient visits, which affected their revenue streams and forced many to rethink their service delivery models. The increased demand on one side and disruptions on the other created a complex business environment that required quick adaptation and significant investment in new technologies and safety measures. For ERTC eligibility, businesses in this sector must detail how these shifts required maintaining or even increasing staff during a period when many other industries were letting employees go, thereby justifying the retention credits.
  • Rural Agricultural Disruptions in Enid: In Oklahoma's rural areas, agriculture businesses confronted interrupted supply chains and shifts in market demand that impacted both revenue and employment practices. Farmers and agricultural producers faced challenges in accessing markets, with closed borders and reduced restaurant demands severely impacting those who supplied perishable goods. Additionally, disruptions in the supply chain for seeds, fertilizers, and other essentials further complicated planting and harvesting cycles. These businesses need to document the extent of these disruptions and their effects on operations and workforce maintenance to establish their ERTC claims effectively.
  • Lawton: Military and Government Services Impact. Lawton, home to Fort Sill, experienced disruptions primarily in businesses serving the military and government sectors. Many non-essential activities on base were reduced or suspended, impacting local businesses that rely on the patronage of military personnel and their families. Restaurants, retail stores, and service providers near the base saw decreased foot traffic and sales. Businesses should document the periods of reduced operations, shifts in service models (like expanding delivery services), and how they managed to maintain employment during these downturns.
  • Norman: Education Sector and Related Businesses. Norman, home to the University of Oklahoma, saw a significant decline in activity as the university shifted to remote learning. This affected local businesses that cater to students and university staff, including cafes, bookstores, and student housing providers. With fewer students and faculty on campus, the demand for these services plummeted. Documentation for ERTC should include details on lost revenue due to decreased campus activity, adaptation to new business models, and efforts to retain employees during the academic shutdowns.
  • Broken Arrow: Manufacturing and Small Business Challenges. Broken Arrow, a hub for manufacturing and small businesses, faced challenges as supply chains were disrupted and consumer spending decreased. Manufacturing firms had to adjust production schedules and implement strict health protocols, often leading to reduced operational capacity. Small businesses, particularly in the retail and hospitality sectors, experienced forced closures or had to operate at reduced capacity due to social distancing measures. Records essential for ERTC claims include documentation of operational changes, financial impacts, and strategies implemented to maintain workforce levels.
  • Edmond: Healthcare and Essential Services. Edmond, with a robust healthcare sector, saw an increase in demand for medical services but also faced challenges such as securing sufficient personal protective equipment (PPE) and managing staff burnout. Non-medical businesses, however, especially in the retail and personal services sectors, experienced revenue losses due to lockdowns and ongoing restrictions. Businesses need to keep detailed records of increased operational costs in healthcare and lost revenues in other sectors, along with measures taken to support and retain staff.
  • Stillwater: Restaurant and Entertainment Venues. Stillwater, another college town with Oklahoma State University, saw its restaurants and entertainment venues struggle as public gatherings were restricted and the university held classes remotely. The drop in student and visitor presence led to a significant downturn for businesses that thrive on entertainment and dining out. Documentation should focus on the extent of revenue losses, transition to online or takeaway services, and employee retention strategies during periods of low activity.

For businesses across Tulsa, Oklahoma City, and rural Oklahoma, the narrative of navigating the pandemic is marked by adaptation, resilience, and an ongoing struggle to maintain operational continuity and workforce stability. Thorough documentation of these impacts not only supports their claims for financial relief through the ERTC but also prepares them to address any scrutiny from IRS audits. By detailing the operational changes, financial losses, and efforts to retain employees, these businesses can robustly defend their eligibility for crucial support during unprecedented times.

Common Triggers for IRS Audits in Oklahoma

Businesses in Oklahoma might face IRS audits due to:

  • Inconsistencies in Financial Reporting: Discrepancies between ERTC claims and other financial information can raise red flags.
  • Excessive Claims: Claims that seem disproportionate to the business's operational impact or industry standards can trigger scrutiny.
  • Random Selection: Routine checks by the IRS to ensure compliance across all sectors.

Avoiding Common Errors in ERTC Claims

Businesses in Oklahoma might face IRS audits due to:

  • Inconsistencies in Financial Reporting: Discrepancies between ERTC claims and other financial information can raise red flags.
  • Excessive Claims: Claims that seem disproportionate to the business's operational impact or industry standards can trigger scrutiny.
  • Random Selection: Routine checks by the IRS to ensure compliance across all sectors.

Avoiding Common Errors in ERTC Claims

Oklahoma businesses often encounter several pitfalls when applying for the ERTC:

  • Misunderstanding Eligibility: Incorrect interpretations of what constitutes a significant decline in gross receipts or a government-mandated suspension.
  • Poor Documentation: Failing to maintain detailed records that substantiate the impact of COVID-19 on business operations and employment.
  • Calculation Mistakes: Errors in determining the amount of credit due, often due to complexities in understanding eligible wages.

Essential Documentation for ERTC Audit Defense

Building a strong defense against an ERTC audit involves comprehensive documentation:

  • Detailed Employment Records: Documentation should clearly show employee retention and payroll expenses throughout the affected periods.
  • Financial Statements: Records must demonstrate the correlation between the pandemic and financial outcomes such as revenue declines.
  • Government Mandate Compliance: Evidence that the business complied with state and federal COVID-19 related regulations affecting operations.

Role of Tax Attorneys in ERTC Audit Defense

Tax attorneys play an indispensable role in navigating the ERTC audit landscape in Oklahoma by providing:

  • Expert Legal Guidance: Offering interpretations of complex tax laws and how they apply to specific business scenarios.
  • Audit Preparation Support: Assisting businesses in organizing and reviewing documentation to robustly support the ERTC claim.
  • Representation During Audits: Handling communications and negotiations with the IRS, ensuring that the business's interests are effectively represented.

Proactive Strategies for Audit Preparation

Oklahoma businesses can adopt several proactive measures to minimize audit risks:

  • Routine Documentation Review: Ensuring all documents related to the ERTC are accurate, complete, and readily accessible.
  • Continuous Legal and Financial Consultation: Staying updated on changes to ERTC regulations and IRS auditing practices through regular consultations with tax experts.
  • Internal or Third-Party Audits: Conducting practice audits to identify any potential issues before the IRS reviews the claims.

Cultivating a Culture of Compliance

Developing a corporate culture focused on compliance can significantly ease the challenges associated with ERTC audits. This involves training employees on the importance of accurate record-keeping, updating compliance protocols regularly, and implementing strong internal controls to manage financial reporting and tax filings.

Conclusion: Ensuring Long-Term ERTC Benefits in Oklahoma

For Oklahoma businesses, effectively managing ERTC claims involves more than just meeting eligibility requirements. It requires strategic planning, meticulous documentation, proactive audit defense measures, and the utilization of specialized legal expertise. By adopting these practices, businesses across Oklahoma can confidently navigate the complexities of ERTC audits and ensure continued financial stability 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: July 10, 2024

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