Brotman Law May 5, 2024 14 min read

South Dakota ERTC Audit Defense Best Practices

How South Dakota Businesses Can Protect Themselves Against IRS ERC Audit Enforcement

In South Dakota, where the economy is diverse, ranging from agricultural operations in Sioux Falls to tourism in Rapid City and small manufacturing enterprises in Aberdeen, the Employee Retention Tax Credit (ERTC) has played a pivotal role during the COVID-19 pandemic. This federal initiative supports eligible businesses that maintained their workforce during significant economic downturns caused by the pandemic. However, while the ERTC provides essential financial relief, it also subjects recipients to the potential of IRS audits. For businesses in South Dakota, it’s vital to understand how to effectively prepare for and navigate these audits to continue benefiting from the program without complications.

This guide will discuss ERTC audit defense strategies tailored to the economic backdrop of South Dakota, highlighting the importance of legal expertise in ensuring robust defense mechanisms and detailing actionable steps businesses can take to mitigate audit risks.

ERTC Essentials for South Dakota Businesses

The ERTC offers a refundable tax credit to employers who sustained employment levels throughout the pandemic despite experiencing financial hardships. Eligibility for the credit requires demonstrating either a significant decline in gross receipts or operational suspensions mandated by governmental orders.

Understanding the Pandemic-Related Government Orders in South Dakota Applicable to the Employee Retention Tax Credit.

In South Dakota, a series of COVID-19 related executive orders issued by Governor Kristi Noem throughout 2020 and 2021 significantly impacted businesses, affecting their operations and the potential for claiming the Employee Retention Tax Credit (ERTC). Here's an overview of these directives and their implications:

  • State of Emergency Declaration (March 13, 2020): This initial declaration allowed South Dakota to activate broader measures impacting businesses and set the stage for subsequent orders relevant to ERTC claims.
  • Back to Normal Plan (April 28, 2020): Directed businesses to resume operations with measures for physical distancing and sanitation in place, affecting businesses' ability to retain employees and comply with ERTC requirements.
  • No Statewide Mask Mandate: South Dakota did not impose a statewide mask mandate, differing from many states. However, local businesses often implemented their own policies, affecting employee and customer interactions and operational dynamics relevant to the ERTC.
  • Closure and Reopening of Schools (March-August 2020): These orders impacted businesses particularly in communities dependent on school schedules, influencing employee availability and potentially ERTC claims during periods of remote learning.
  • Public Events and COVID-19 Surges: Events like the Sturgis Rally led to significant COVID-19 case surges. Businesses associated with such events faced operational challenges and public scrutiny, impacting their financial stability and ERTC eligibility.
  • Assistance for Enclosed Retail Businesses (April 28, 2020): Specific guidelines were set for businesses promoting public gatherings, including restaurants and entertainment venues, which had to innovate to maintain operations and navigate ERTC claims.
  • Relaxed Business Hours for Bars and Restaurants: Later in 2020, restrictions on business hours were eased, allowing these establishments to increase operations and potentially stabilize revenues and retain employees, important for ERTC eligibility.
  • Financial Stimulus and Support Measures: Various federal and state financial aids were provided, influencing how businesses could sustain operations and manage payroll, central to ERTC audit defense.
  • Impact of Noem’s Pro-Liberty Policies: Governor Noem's approach favored minimal restrictions, which meant businesses often operated without stringent state-enforced COVID-19 safety measures, affecting how they documented safety compliance for ERTC purposes.
  • Litigation and Political Responses: Governor Noem’s decisions, such as opposing mandatory COVID-19 safety measures, framed the regulatory environment within which businesses had to operate and claim the ERTC.

Throughout this period, Governor Noem maintained a stance that emphasized economic activity and individual responsibility over mandated health measures, creating a unique business environment in South Dakota. For businesses, navigating the eligibility requirements of the ERTC amidst these varied directives required careful documentation of operational changes, employee retention efforts, and adherence to any applicable COVID-19 safety measures. Understanding and documenting the impact of these government orders was crucial for effectively claiming the credit and defending against ERC audits.

Understanding Local Orders and Impact Applicable to Employee Retention Tax Credit Audits

In South Dakota, the COVID-19 pandemic's impact varied significantly across key cities, each facing unique challenges that influenced local businesses and their operations. Understanding these specific impacts is crucial for businesses to document their eligibility for the Employee Retention Tax Credit (ERTC) effectively.

  • Sioux Falls: Agricultural and Food Processing Challenges Sioux Falls, as South Dakota’s largest city and a pivotal agricultural center, encountered substantial disruptions, particularly within the food processing industries. The city hosts several major food processing plants which had to implement rigorous COVID-19 safety measures to continue operations. Despite these efforts, outbreaks did occur, leading to temporary closures and significant operational disruptions. These closures not only affected the plants but also had a cascading effect on the local economy, including suppliers and ancillary businesses. For businesses in Sioux Falls, documenting the direct impact of these disruptions, such as employee furloughs or operational scaling back, was essential for substantiating ERTC claims.
  • Rapid City: Tourism and Retail Disruptions Rapid City's economy, heavily reliant on tourism and retail, faced severe challenges due to national lockdowns and travel restrictions. The city, known for attractions like Mount Rushmore and its proximity to national parks, saw a dramatic fall in tourist numbers. Local businesses, from souvenir shops to hotels and restaurants, experienced unprecedented revenue drops. The impact of these restrictions meant that many businesses had to make tough decisions regarding staffing, directly affecting their ability to maintain payroll and claim the ERTC. For these businesses, detailed records of revenue declines and related employment decisions are key components of a robust ERTC audit defense.
  • Aberdeen: Manufacturing and Local Business Hurdles In Aberdeen, smaller-scale manufacturers and local businesses grappled with multiple challenges, from supply chain disruptions to reduced consumer spending. Aberdeen's manufacturing sector, which includes a range of industries from electronics to food products, had to navigate both the availability of raw materials and the decreased demand for products. Local businesses, particularly in the service sector, faced reduced customer footfall as community mitigation measures were put in place. For these entities, maintaining comprehensive records of how operational challenges impacted their workforce and financial health is crucial for ERTC documentation.

These cities illustrate the varied economic impacts of COVID-19 across South Dakota. Businesses in these locales had to adapt rapidly and make significant changes to their operations, workforce, and strategies. Effective documentation of these changes, in compliance with ERTC requirements, is not just beneficial but necessary for navigating potential audits. The ability to provide detailed and accurate records reflecting the pandemic's impact is vital for securing and defending ERTC claims, ensuring that businesses can continue to recover and thrive in the post-pandemic economic landscape.

The Viability of ERTC Claims in South Dakota

In South Dakota, as in other states, the ERTC provides eligible employers with a refundable tax credit against certain employment taxes equal to 50% of the qualified wages they paid to employees after March 12, 2020, and before January 1, 2021. For 2021, this credit was enhanced to cover 70% of qualified wages paid up until December 31, 2021. The introduction of such credits was intended to incentivize businesses to retain employees despite experiencing economic hardship due to the COVID-19 pandemic.

South Dakota businesses across various sectors including retail, manufacturing, and services have faced significant operational disruptions. From the sudden drop in tourism in places like Rapid City to the impact on local manufacturers in Aberdeen, the economic uncertainty has made the ERTC a valuable resource. However, navigating the eligibility requirements—such as determining qualified wages, calculating the credit properly, and understanding associated risks like health mandates affecting operations—requires precise attention to detail and a thorough understanding of evolving tax laws.

Why Hire a Tax Attorney for ERTC Audit Defense

Hiring a tax attorney becomes essential when considering the complexity of ERTC claims and the potential for IRS audits. Here’s why South Dakota businesses should consider this strategic move:

  • Expert Guidance on Complex Regulations: Tax attorneys provide expert guidance on the complex web of federal and state tax regulations that govern ERTC claims. They can decipher nuanced tax codes and ensure that your business’s claim complies with all legal requirements, thereby safeguarding against inadvertent errors that could trigger an audit.
  • Preparation and Defense for Audits: ERTC audits can be triggered by discrepancies in the claim, such as mismatches in reported wages or excessive credit amounts relative to the size of the business. A tax attorney can preemptively review your business’s claim to identify and rectify potential red flags before they draw IRS attention. Moreover, in the event of an audit, a tax attorney can represent your business, handle negotiations, and advocate on your behalf to ensure fair treatment and the best possible outcome.
  • Strategic Planning and Documentation: Effective management of ERTC claims requires meticulous documentation and strategic planning. Tax attorneys assist businesses in organizing necessary documentation and implementing best practices for record-keeping. This preparation is vital not only for claiming the credit but also for defending the claim during an audit.
  • Ongoing Compliance and Updates: Tax laws and guidelines related to the ERTC have evolved since their inception. A tax attorney stays abreast of these changes and can provide timely updates to ensure your business continues to comply with new regulations, maximizing your benefit from the program while minimizing risks.

In conclusion, for South Dakota businesses looking to leverage the Employee Retention Tax Credit effectively, the assistance of a tax attorney is invaluable. With their expertise in tax law and audit defense, tax attorneys ensure that businesses can confidently navigate the complexities of the ERTC, from claim preparation and compliance to audit defense, thus providing a solid foundation for ongoing financial stability and growth.

"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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