Brotman Law June 27, 2024 20 min read

Effective ERTC Audit Defense Strategies for West Virginia Businesses

Strategic ERTC Audit Defense for West Virginia Businesses

In West Virginia, where the economy includes a mix of industries such as energy production, particularly coal mining in the Appalachians, manufacturing in the northern regions, and a growing tourism sector, the Employee Retention Tax Credit (ERTC) has been a significant support during the economic uncertainties brought about by the COVID-19 pandemic. This federal program assists businesses that have maintained their workforce despite experiencing considerable financial challenges. However, utilizing the ERTC also means these businesses may be subject to IRS audits. For West Virginia companies, understanding ERTC compliance is crucial to maximizing the program's benefits and effectively handling potential audits.

This guide will provide strategies for ERTC audit defense tailored to West Virginia’s unique economic environment, emphasizing the importance of comprehensive preparation and specialized legal advice.

Understanding the ERTC in West Virginia’s Economic Environment

The ERTC offers a refundable tax credit to employers who kept employees on their payroll during significant declines in gross receipts or operational suspensions mandated by government COVID-19 restrictions. For West Virginia businesses, especially those in sectors directly impacted by such disruptions, accurately documenting these impacts is essential for establishing ERTC eligibility and preparing for potential IRS audits.

West Virginia Statewide Orders That May Have Impacted Their Business

In 2020 and 2021, West Virginia, under Governor Jim Justice, implemented several COVID-19 orders that significantly impacted businesses across the state. These orders, often in response to shifting pandemic conditions, directly affected operations, influencing factors relevant to the Employee Retention Tax Credit (ERTC) and potential ERC audits. Here’s a summary of ten such orders and their implications for businesses seeking to understand their impact concerning ERTC audits:

  • State of Emergency Declaration (March 2020): Governor Justice declared a state of emergency, leading to widespread business closures. Non-essential businesses had to temporarily shut down, significantly impacting their revenue and operations, a key consideration for ERTC eligibility.
  • Closure of Non-Essential Businesses (March 2020): Specific mandates closed all non-essential businesses, severely affecting retail, hospitality, and service sectors. These businesses could claim the ERTC if they retained employees despite the closures.
  • Mandatory Stay-at-Home Order (March 2020): This order required all residents to stay at home unless performing essential activities, drastically reducing customer foot traffic for all non-essential businesses and impacting their financial health, relevant for the ERTC.
  • Phased Reopening Plan (May 2020): The introduction of a phased reopening plan allowed businesses to gradually resume operations under strict health guidelines, affecting staffing and operational capacities. Compliance with these guidelines was essential for businesses to qualify for the ERTC during this period.
  • Mask Mandate (July 2020): The statewide mandate required face coverings in all indoor public places, impacting employee interactions and operations. Businesses had to invest in personal protective equipment to comply, which could be factored into their ERTC claims.
  • Limitations on Large Gatherings (August 2020): Restrictions on the size of public gatherings continued to impact venues, event organizers, and hospitality businesses, all relevant for ERTC claims as these businesses struggled to maintain their workforce amidst limited operations.
  • Temporary Closure of Bars in Certain Counties (September 2020): Targeted closures in response to spikes in COVID-19 cases, particularly in counties like Monongalia, home to a large student population, impacted many businesses. Such specific geographic impacts are important for ERTC documentation and audits.
  • Adjustment to Restaurant and Bar Hours (October 2020): Changes to operating hours for restaurants and bars limited service times, impacting revenues and operational viability, and thereby influencing ERTC eligibility.
  • Reduction in Public Gathering Sizes (November 2020): As cases surged, the state further reduced public gathering limits from 25 to 10 people, significantly impacting businesses reliant on event-based revenue, a critical point in ERC audits.
  • Vaccination Rollout and Impact on Business Operations (Early 2021): As vaccines became more available, businesses faced new challenges and opportunities in returning to normal operations. The ability to maintain or increase staffing levels during this period could have impacted their operations. If impact was more than nominal, this order would serve as the substantiation needed during an ERTC audit, especially one examining the full period of the pandemic’s impact.
  • Governor Justice's Leadership and Business Impact:
    Throughout these challenging times, Governor Justice’s administration sought to balance public health needs with economic impacts. His leadership during the pandemic, including the direct communication during regular briefings, helped guide businesses through the ever-changing landscape of COVID-19 regulations. For businesses in West Virginia, understanding the nuances of each order and its timing is crucial for preparing for an Employee Retention Tax Credit audit. Proper documentation of how these orders affected business operations, staffing, and revenues will be key in substantiating ERTC claims during an audit.

    In conclusion, for West Virginia businesses, aligning these state-specific COVID-19 orders with federal ERTC guidelines is essential. Keeping detailed records of how each directive impacted your business will support your claims and help ensure compliance in case of an ERC audit. This proactive approach not only aligns with Governor Justice’s directives but also positions businesses favorably for navigating post-pandemic economic recovery.

The Economic Implications of COVID-19 on West Virginia

West Virginia, with its rich industrial heritage, faced significant challenges across its key economic sectors due to the COVID-19 pandemic. The state's energy and mining, manufacturing, and tourism industries each experienced unique pressures, profoundly impacting local economies and the lives of many West Virginians.

  • Energy and Mining in Charleston and Morgantown: In Charleston and Morgantown, the traditional powerhouses of coal and natural gas faced unprecedented fluctuations. As the world grappled with reduced energy demand due to global lockdowns, these cities saw a sharp decline in production rates. The challenges were compounded by health and safety restrictions that made mining operations more complex and costly. Workers had to adhere to new safety protocols, while companies struggled to maintain operational efficiency under the stringent COVID-19 guidelines. This downturn not only affected the miners and engineers directly involved but also rippled out to the myriad of businesses that supply and support the energy sector.
  • Manufacturing in Huntington and Parkersburg: Huntington and Parkersburg, long recognized for their robust manufacturing sectors, were not spared from the pandemic's reach. The automotive manufacturers in Huntington found themselves at a crossroads as global supply chains, critical to their production, were disrupted. This led to shortages of parts and materials, forcing slowdowns in production and, in some cases, complete halts. Similarly, in Parkersburg, known for its chemical plants, manufacturers had to navigate through reduced workforce capacities and interrupted supply chains. These disruptions were a blow to the local economy, which relies heavily on manufacturing jobs and the stability they bring to the community.
  • Tourism in the New River Gorge: The New River Gorge, a jewel in West Virginia's tourism crown, felt a stark decline in visitor numbers as travel restrictions took hold. Known for its stunning landscapes and outdoor recreational activities, the area suffered as tourists postponed or canceled travel plans. Local businesses, from rafting companies to restaurants and lodges, faced significant financial strain as the flow of tourists, which they depend on for survival, trickled to a near halt. The impact of the pandemic on tourism was particularly painful during the peak summer months, which traditionally see thousands of visitors flocking to the region for its natural beauty and adventure sports.
  • Huntington: University Community and Small Business Disruptions: Huntington, home to Marshall University, saw a substantial impact when the university transitioned to remote learning. This shift drastically reduced the student and faculty presence in the city, directly affecting local businesses, particularly in the service, retail, and rental sectors. Bars, restaurants, and cafes had to quickly adapt to a decrease in clientele by enhancing delivery services or transitioning to online sales. Businesses in Huntington should keep detailed records of changes in operation modes and efforts to retain employees during this period for ERTC eligibility.
  • Morgantown: Tourism and Event-Based Economy Downturn: Morgantown, heavily reliant on tourism and events related to West Virginia University, faced challenges as the pandemic led to the cancellation of sporting events and academic conferences. This significantly reduced revenue for hotels, event venues, and nightlife establishments. These businesses had to pivot operations, often incurring additional costs to develop online engagement opportunities and virtual event capabilities. Documentation for ERTC claims should include details on event cancellations, revenue impacts, and adaptation costs.
  • Parkersburg: Manufacturing and Industrial Slowdown: In Parkersburg, a city with a robust manufacturing sector, businesses faced disruptions due to supply chain issues and reduced demand for industrial products. Factories had to reduce shifts or temporarily shut down operations while ensuring safety measures were in place for workers, affecting their operational capacity and revenue. Manufacturers need to document operational disruptions, payroll details, and how they managed to retain employees despite reduced production for ERTC claims.
  • Wheeling: Hospitality and Retail Sector Hardship: Wheeling, known for its historical sites and cultural offerings, saw a significant downturn in its hospitality and retail sectors due to reduced tourist visits. Local businesses such as boutiques, artisan shops, and restaurants experienced prolonged periods of low sales. Many establishments shifted focus to local customers and enhanced their online presence to sustain operations. For ERTC claims, it’s important for these businesses to maintain records of sales decline, changes in business models, and employee retention strategies.

For all these sectors, the narrative of navigating through the pandemic involves resilience, adaptation, and strategic foresight. Accurate documentation of the economic impacts and operational changes is crucial in order to support your ERTC claim.  This comprehensive approach ensures that businesses can effectively substantiate their eligibility for the credit, providing a clear basis for financial relief and preparation for detailed reviews by tax authorities.

IRS Audit Triggers West Virginia Businesses Should Be Aware Of 

Businesses in West Virginia might face IRS audits due to:

  • Inconsistencies in Financial Reporting: Discrepancies between the information provided in ERTC claims and other financial or employment records can raise red flags.
  • Excessive Claims: Claims that appear disproportionate to the business's operational impact or size may trigger further scrutiny.
  • Random Selection: Routine checks by the IRS as part of efforts to ensure compliance and verify the accuracy of claims.

Avoiding Common Mistakes in ERTC Claims

When applying for the ERTC, West Virginia businesses often encounter several pitfalls:

  • Misinterpreting Eligibility: Incorrect assessments of what qualifies as significant operational disruption or substantial decline in gross receipts.
  • Inadequate Documentation: Failing to maintain detailed records that 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.

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

  • 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 West Virginia, tax attorneys are vital 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 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, West Virginia 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.

Fostering a Culture of Compliance

Developing a corporate culture that emphasizes compliance can significantly aid in managing ERTC audits. This includes 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 West Virginia

For businesses across West Virginia, 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 West Virginia’s diverse economic environment.

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-Aileen Dwight, Licensed Clinical Social Worker & Psychotherapist

Last updated: July 8, 2024

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