Brotman Law May 13, 2024 22 min read

Wisconsin Employee Retention Tax Credit Defense: An Overview

How Wisconsin Businesses Can Use Strategy To Defend Against IRS ERTC Audits

In Wisconsin, where the economy is supported by manufacturing in Milwaukee, agriculture throughout the state, and a thriving service sector in Madison, the Employee Retention Tax Credit (ERTC) has provided crucial support during the economic disruptions caused by the COVID-19 pandemic. This federal program aids businesses that have managed to retain their workforce despite facing economic hardships. However, the ERTC also exposes businesses to potential IRS audits. For Wisconsin companies, it is essential to understand the complexities of ERTC compliance to ensure they can continue benefiting from the program and handle audits effectively.

This guide will offer detailed strategies for ERTC audit defense suitable for Wisconsin's diverse economic landscape, highlighting the necessity of meticulous preparation and the vital role of legal expertise.

Overview of the ERTC in Wisconsin’s Economic Landscape

The ERTC offers a refundable tax credit to employers who retained staff despite facing significant operational disruptions or declines in gross receipts due to government-mandated COVID-19 restrictions. For businesses across Louisiana’s diverse sectors, understanding the specifics of these criteria is vital.

Understanding the ERTC in Wisconsin’s Business Environment

The ERTC provides a refundable tax credit to employers who kept employees on their payroll during periods of significant revenue decline or operational suspension mandated by governmental COVID-19 restrictions. For businesses across Wisconsin's key sectors, accurately documenting how these challenges have impacted their operations is critical.

Below is a detailed summary of ten significant COVID-19 orders issued in Louisiana during 2020 and 2021 under Governor John Bel Edwards. This summary highlights how these directives impacted businesses, especially in relation to the Employee Retention Tax Credit (ERTC) Audit.

Wisconsin Statewide Pandemic Orders That May Have Impacted Their Business

Wisconsin had a variety of state-wide orders issued by Governor Tony Evers that were in effect during the COVID-19 Pandemic. Depending on the type of business and the location of that business, these orders may have caused a variety of impacts on a local business, which could have risen to the level of materiality sufficient enough to qualify for the Employee Retention Tax Credit. Here is an overview of some of those orders.

  • Public Health Emergency Declaration (March 2020) - Governor Tony Evers declared a public health emergency, marking the beginning of statewide response efforts. This foundational order allowed for the mobilization of state resources and set the stage for business-related restrictions, which were critical for establishing ERTC claims due to initial disruptions.

  • Safer at Home Order (March 2020)- This order mandated the closure of non-essential businesses and required residents to stay at home unless for essential needs, significantly reducing customer traffic and forcing businesses to halt or limit operations. This direct interruption supports ERTC claims by mandating suspensions.

  • Mandatory Mask Mandate (August 2020) - The statewide mandate required masks in all indoor public spaces, adding operational challenges and costs for businesses that had to enforce this rule and manage compliance issues, impacting customer interactions and potentially affecting revenues.

  • Emergency Order Limiting Indoor Public Gatherings (October 2020) - Limitations were placed on the size of indoor gatherings, affecting venues, restaurants, and retail businesses by capping customer capacity, which directly influenced their operational viability and profitability.

  • Phased Reopening Plans (May 2020) - Wisconsin introduced a phased approach to reopening, allowing businesses to resume operations under strict health guidelines and capacity limits. Even with reopening, these restrictions qualified businesses for the ERTC due to ongoing partial suspensions of normal operations.

  • Extension of Public Health Emergency and Orders (Multiple times in 2020 and 2021) - The repeated extensions highlighted the ongoing impact of the pandemic, reinforcing the need for continued ERTC eligibility due to persistent operational disruptions.

  • Financial Assistance Programs for Small Businesses (2020) - Various state-sponsored aid programs were launched to support businesses facing financial strain. Participation in these programs can support ERTC claims by demonstrating financial distress and the necessity of funds to retain employees.

  • Order for Temporary Ban on Evictions and Foreclosures (March 2020) - This order helped businesses preserve cash flow by temporarily suspending evictions and foreclosures, providing indirect support during operational downturns.

  • Guidance on Safe Business Operations (Ongoing) - The state issued continuous guidance on safe operational practices for businesses, necessitating investments in safety measures and adjustments in how businesses interact with customers and manage employees.

  • Vaccination Rollout and Impact on Business Operations (2021) - The availability of vaccines led to gradual changes in consumer confidence and business operations, impacting how businesses planned their staffing and adapted their operations to meet changing public health guidelines.

Throughout the pandemic, Governor Tony Evers' administration took several measures aimed at mitigating the spread of COVID-19 while trying to manage economic impacts. For Wisconsin businesses preparing for an Employee Retention Tax Credit Audit, documenting how each state order impacted their operations, financial health, and employment practices is crucial. 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 Wisconsin's Economy 

As the COVID-19 pandemic swept across Wisconsin, it left a varied impact on different regions, reshaping the economic landscape of places like Milwaukee, Madison, and rural areas of the state. Each region faced unique challenges that significantly altered their business operations, revenue streams, and overall economic health. Understanding and documenting these changes is crucial for businesses aiming to substantiate their eligibility for the Employee Retention Tax Credit (ERTC) and to prepare effectively for potential IRS audits.

  • Milwaukee's Manufacturing Sector Challenges: Milwaukee, renowned for its robust manufacturing base, encountered significant hurdles as the pandemic instigated widespread production halts and supply chain disruptions. The city's factories, which produce everything from machinery to consumer goods, faced raw material shortages and delays in component deliveries as global supply networks ground to a halt. This disruption forced many manufacturers to reduce production volumes or shut down entirely for periods, leading to layoffs and reduced work hours. For Milwaukee’s manufacturing sector, the pandemic also accelerated shifts towards automation and re-evaluation of supply chain resilience. Documenting these operational shifts, workforce adjustments, and financial impacts is vital. This detailed record will help Milwaukee’s manufacturers demonstrate how the pandemic necessitated retaining employees despite reduced operations, a key aspect of qualifying for the ERTC.
  • Madison: Educational and Research Institution Interruptions - In Madison, home to the University of Wisconsin and numerous research facilities, the pandemic led to a drastic shift in operations. Educational institutions and research centers were largely closed for in-person activities, impacting not only faculty and staff employment but also ancillary businesses such as campus dining and student services. Many employees were shifted to remote work, which brought additional costs for setting up home offices and online teaching resources. Madison businesses and institutions should maintain records of campus closures, transition to online platforms, and efforts to continue paying staff during these shifts for ERTC documentation.
  • Green Bay: Hospitality and Event Sector Downturn - Green Bay, which hosts a large number of events due to its sports and entertainment venues, saw a significant decline in hospitality revenue. Hotels, restaurants, and bars, especially those reliant on game-day crowds, faced severe losses as major events were canceled or held without spectators. The local businesses had to quickly adapt by enhancing takeout services or transitioning to event-less operations, incurring new costs and managing reduced income. Documentation for ERTC claims should include details of event cancellations, changes in service models, and payroll records during the affected periods.
  • Kenosha: Retail and Service Industry Setbacks - In Kenosha, retail and service sectors were heavily impacted by strict lockdown measures and curfews, particularly during periods of civil unrest. Many small businesses had to shut down completely or operate at limited capacity for extended periods. The shift to online sales platforms required additional investment in digital marketing and e-commerce capabilities, straining the financial resources of these businesses. For effective ERTC claims, Kenosha retailers would need to compile evidence of government orders affecting their operations, investments in new sales channels, and strategies to retain employees despite reduced operations.
  • Racine: Healthcare Services Strain - Racine’s healthcare providers faced unprecedented challenges as they became the front line in combating the pandemic. Clinics and hospitals had to postpone non-emergency procedures to free up resources for COVID-19 cases, resulting in significant revenue loss. At the same time, they incurred additional expenses related to purchasing personal protective equipment (PPE) and implementing new health and safety protocols. For Racine healthcare businesses, documenting these financial impacts, along with efforts to avoid layoffs among non-COVID-related staff, is crucial for supporting ERTC claims.
  • Rural Wisconsin's Agricultural Volatility: Rural areas in Wisconsin, heavily reliant on agriculture, dealt with their own set of pandemic-induced challenges. Farmers faced market fluctuations that saw dramatic shifts in demand, particularly from commercial buyers like restaurants and schools, alongside logistical challenges in transporting goods to markets. These issues were compounded by disruptions in the availability of seasonal labor and necessary farming supplies. For agricultural businesses in rural Wisconsin, maintaining detailed records of how market fluctuations and logistical challenges affected production and sales is crucial. Such documentation will substantiate their ERTC claims by illustrating the direct impact on their operations and the necessity of retaining staff during uncertain market conditions.

For all these areas in Wisconsin, the narrative of navigating through the pandemic involves significant adaptation, resilience, and strategic decision-making. Precisely documenting the economic effects of COVID-19 is not just about capturing financial losses but also about detailing the operational challenges and workforce dynamics. This comprehensive approach ensures that businesses can effectively substantiate their ERTC eligibility and are well-prepared for any scrutiny during IRS audits.

Understanding the Risks Associated with ERTC Audits in Wisconsin

Wisconsin businesses, like those across the nation, have navigated a labyrinth of challenges due to the COVID-19 pandemic. One significant support mechanism has been the Employee Retention Tax Credit (ERTC), designed to incentivize businesses to keep employees on their payroll during these tumultuous times. However, the benefits of the ERTC come with complex compliance requirements, which, if not properly managed, can expose businesses to significant risks during an IRS audit. Consulting with a tax attorney is not only advisable but essential for navigating these risks effectively.

Further Understanding the ERTC

The ERTC provides a refundable tax credit to eligible employers for wages paid to employees during periods when business operations were either fully or partially suspended due to governmental COVID-19 restrictions or during which the business experienced a significant decline in gross receipts. While the ERTC offers substantial financial relief, the criteria for eligibility and the process of claiming the credit are fraught with complexities that can lead to errors and misinterpretations.

Risks in an ERTC Audit

Misinterpretation of Eligibility Criteria:

The rules governing eligibility are specific and detailed. Misunderstandings about which employees qualify, what constitutes a significant decline in gross receipts, or how to apply credits if also receiving benefits from other programs like PPP loans can lead to non-compliance. An IRS audit can reveal these discrepancies, potentially leading to the denial of the credit and demands for repayment.

Inadequate Documentation:

Proper documentation is crucial and must substantiate every aspect of the ERTC claim. This includes detailed payroll records, proof of qualifying wages, evidence of business disruption due to COVID-19, and accurate financial records. Inadequate documentation can be a red flag for auditors, leading to further scrutiny and potential penalties.

Overclaimed Credits:

Overclaiming, whether intentional or accidental, is a significant risk during an ERTC audit. This could occur if a business misunderstands the wage caps or claims the credit for non-qualifying wages. Such errors can result in hefty fines and the repayment of overclaimed credits with interest.

Double Dipping:

'Double dipping'—claiming multiple forms of governmental assistance for the same wages—is expressly prohibited. For instance, wages that are covered by PPP loan forgiveness cannot also be claimed for the ERTC. Failure to adhere to this rule can lead to the disqualification of credits and other legal repercussions.

The Role of a Tax Attorney in an ERTC Audit

Consulting a tax attorney is crucial for several reasons:

Expertise in Tax Laws Surrounding the Credit:

Tax attorneys specialize in the nuances of tax law and stay updated on all legislative changes affecting tax credits. Their expertise is invaluable in interpreting complex regulations and applying them correctly to a business's unique circumstances.

ERTC Audit Defense:

A tax attorney can provide robust defense strategies if an audit occurs. They can handle communications with the IRS, negotiate on behalf of the business, and ensure that the company's rights are protected throughout the process.

Strategic Documentation:

Tax attorneys can advise on the types of records needed and how to maintain them to support an ERTC claim effectively. This proactive approach can mitigate risks identified during an audit.

Maximizing the Credit:

Tax attorneys help ensure that a business claims the maximum credit it is legally entitled to, without stepping over compliance boundaries. They can also provide guidance on how to structure business operations and payroll to optimize tax benefits legally.

Peace of Mind:

Knowing that a qualified professional is managing the complexities of the ERTC allows business owners to focus on running their business. This can alleviate stress and reduce the internal resources devoted to managing compliance issues.

Conclusion: An Ounce of Prevention is Worth a Pound of Cure When It Comes To ERTC Audit Defense

The risks associated with an ERTC audit for Wisconsin businesses can pose significant financial and operational challenges. The complexities of the tax credit system require a sophisticated understanding of tax law, meticulous record-keeping, and strategic planning. A tax attorney is not merely a legal advisor but a strategic partner in navigating these challenges, ensuring compliance, and defending the business's interests against IRS scrutiny. Consulting with a tax attorney is not just about managing risks; it's about securing the financial support that can help sustain the business through the pandemic and beyond.

"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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