Brotman Law May 13, 2024 23 min read

Successful Wyoming ERTC Audit Defense

How Businesses Can Handle Employee Retention Tax Credit Audit Issues

In Wyoming, where the economy is driven by sectors such as energy, agriculture, and tourism, the Employee Retention Tax Credit (ERTC) has been a crucial lifeline for businesses during the COVID-19 pandemic. This federal initiative provides significant financial support by offering a refundable tax credit to businesses that maintained employment despite economic disruptions. However, the receipt of ERTC also means that businesses could be subject to IRS audits. For Wyoming businesses, it is essential to understand the specifics of ERTC compliance to safeguard against potential audits and continue reaping the program's benefits without interruption.

This article will explore effective ERTC audit defense strategies specific to Wyoming’s economic landscape, highlighting the importance of proactive preparation and the critical role of tax attorneys in navigating these complex processes.

ERTC Fundamentals for Wyoming Businesses

The ERTC allows businesses that either experienced a significant decline in gross receipts or had their operations fully or partially suspended by government orders to claim a refundable tax credit. Understanding the precise requirements and maintaining compliance is vital for eligibility and defense against audits.

The ERTC offers a refundable tax credit for businesses that kept employees on payroll during significant operational challenges due to COVID-19. To qualify, businesses must show either a considerable decline in gross receipts or that their operations were fully or partially suspended by a government order.

Although not a complete list, here's an overview of ten significant COVID-19 orders issued in North Dakota during 2020 and 2021 that impacted businesses, particularly in terms of the Employee Retention Tax Credit (ERTC) and audit defenses:

  • Initial Business Closure (March 2020) - Directed by Governor Mark Gordon, non-essential businesses were required to close temporarily. This impacted many businesses' ability to operate, making them eligible for the ERTC by fulfilling the criteria of full or partial suspension of business operations.
  • Limited Operation Orders for Restaurants and Bars (April 2020) - Restaurants and bars were allowed to operate with takeout and delivery services only. The restrictions on in-person dining affected revenue streams, qualifying these businesses for the ERTC due to significant changes in the nature of their business operations.
  • Mandatory Health Measures for Essential Businesses (May 2020) - Essential businesses that remained open were required to implement stringent health measures. The costs incurred and disruptions caused by these measures potentially impacted the calculation of qualified wages for the ERTC.
  • Gradual Reopening Phase (June 2020) - As businesses began to reopen with capacity limits and new operational protocols, they faced continued financial strain and modified operations, which supported their eligibility for the ERTC during this phased reopening.
  • Extension of Health Orders (July 2020) - Extended health orders included the use of masks and social distancing protocols in business environments. Compliance costs and continued operational disruption supported ERTC claims.
  • Further Easing of Restrictions (September 2020) - A further easing allowed increased capacity in public gatherings and business venues. Businesses still under operational constraints could claim the ERTC if they could demonstrate reduced capacity and corresponding impact on their operations.
  • Renewal of Mask Mandates and Social Distancing (November 2020) - As cases surged, renewed mandates potentially impacted businesses during the holiday season, a critical period, making them eligible for further ERTC claims due to government-ordered capacity limitations.
  • Vaccine Rollout and Business Impact (Early 2021) - The beginning of vaccine distribution influenced business operations, as certain sectors could reopen fully while others remained limited. The varied impact on different sectors potentially influenced ERTC eligibility and audits.
  • Relaxation of Statewide Orders (Mid 2021) - As restrictions began to relax further in mid-2021, businesses transitioning back to normal operations continued to be eligible for the ERTC if they had been subject to closures or modifications earlier in the year.
  • End of Statewide Public Health Orders (Late 2021)  - The end of health orders marked a significant transition for businesses. Those still facing reduced customer turnout due to ongoing concerns or disruptions could still apply for the ERTC for previous periods of impact.

Each of these orders, mandated under the authority of Governor Mark Gordon, had substantial impacts on the business environment in Wyoming. For the purposes of an Employee Retention Tax Credit Audit, businesses affected by these orders would need to document how the restrictions affected their operations, including any partial suspensions and significant declines in gross receipts.

Impact of COVID-19 on Wyoming's Economy

In Wyoming, the pandemic's ripple effects varied significantly across different cities, each with its distinct economic drivers. Understanding these local impacts provides a nuanced view essential for businesses to navigate their eligibility for the Employee Retention Tax Credit (ERTC) and prepare for potential audits.

  • Cheyenne: As the state capital, Cheyenne functions as a pivotal hub for government operations and service-related businesses. The onset of the pandemic led to a series of stringent restrictions on service providers and within public offices, which cascaded across the local economy. Government offices either significantly reduced their operational hours or shifted to remote work, impacting everything from daily foot traffic that local cafés and eateries relied on to contracted services that supported the day-to-day function of public institutions. For these businesses, the pandemic wasn't just a public health crisis—it was a stark reduction in their primary revenue streams. Documenting these impacts is critical, particularly showing the direct tie between government restrictions and reduced business activities, which is a cornerstone for establishing eligibility for the ERTC.
  • Cheyenne: Tourism and Event Cancellations - Cheyenne, known for its annual Frontier Days, experienced significant disruptions when this major event, along with others, was canceled due to pandemic-related restrictions. The city's tourism sector, which relies heavily on these events, saw dramatic declines in visitor numbers. Hotels, local restaurants, and retail businesses that typically benefit from the influx of tourists faced severe reductions in revenue. These businesses had to adjust by reducing operational hours and shifting focus to local and online marketing efforts to sustain operations. For ERTC claims, documenting the cancellation of key events, the subsequent drop in foot traffic, and the efforts to adapt to local markets is crucial.
  • Casper: Oil and Energy Sector Slowdown - In Casper, the downturn in the global oil market compounded by pandemic restrictions led to reduced operations in the oil and energy sector, a major employer in the region. Companies faced challenges in maintaining operations due to social distancing requirements and a sharp decline in demand for oil. This resulted in reduced hours and layoffs, though many companies attempted to retain as many employees as possible. Businesses in this sector need to document operational cutbacks, changes in workforce management, and financial impacts for their ERTC claims.
  • Casper: The narrative shifts from public services to the raw pulse of the energy sector. Known for its robust oil and natural gas industries, Casper felt the global energy demand contraction acutely. As international markets faltered and the price of oil plunged, local businesses tied to the energy sector—from drilling companies to the extensive network of support services including equipment suppliers and maintenance firms—faced unprecedented challenges. The domino effect was severe, leading to layoffs and reduced hours across the board. For ERTC purposes, Casper businesses need to outline how these global shifts trickled down to local impacts, affecting their operations and workforce, thereby reinforcing their claims for the tax credit.
  • Laramie: University and Student-Dependent Businesses - Laramie, home to the University of Wyoming, saw significant disruptions as the university shifted to remote learning. Local businesses that depend on the student population, such as cafes, bookstores, and apartment complexes, experienced decreased revenues. Many of these businesses had to innovate quickly, offering online sales, virtual services, or flexible lease terms to retain their customer base and keep staff employed. Documentation of these adaptations, alongside detailed financial records showing the impact of the university's operational changes, is essential for ERTC eligibility.
  • Gillette: Mining and Construction Challenges - Gillette, a hub for Wyoming’s mining and construction industries, faced operational challenges as projects were delayed or canceled due to safety concerns and supply chain disruptions. Businesses in these sectors had to navigate maintaining workforce engagement and safety while dealing with decreased demand. For ERTC claims, it's important for these businesses to maintain records of project delays, employment adjustments, and health and safety expenditures.
  • Rock Springs: Hospitality and Services Decline - Rock Springs, with a significant number of service industry businesses, faced extensive operational restrictions that led to reduced hours and services. Restaurants, hotels, and service providers such as salons and gyms were particularly hard hit. Many of these establishments had to pivot to delivery and pick-up services or virtual platforms to maintain some level of service provision. Documenting these operational shifts, along with efforts to retain employees despite reduced business activities, will be key in substantiating ERTC claim
  • Jackson: presents a different yet equally compelling scenario. Nestled in the picturesque landscapes of Wyoming, Jackson is a town synonymous with tourism. The pandemic's travel restrictions and the subsequent public hesitancy to engage in travel struck at the very heart of this community. Hotels, restaurants, ski resorts, and small retail businesses saw visitor numbers plummet as lockdowns took effect. The seasonal nature of Jackson’s economy, with tourism peaking during the ski season and summer months, compounded these effects. For these businesses, demonstrating the direct correlation between travel restrictions and their declining revenues is crucial for ERTC claims. The detailed monthly or seasonal financial records can serve as strong evidence during an ERTC audit, highlighting the periods of significant downturn and efforts to retain employees despite the challenges.

For all these cities, it is evident that governmental orders significantly impacted local businesses. Businesses that effectively document the chain of cause and effect linking government-mandated restrictions or broader economic shifts to their operational challenges, will be better positioned to navigate ERTC audits. This documentation serves as a crucial historical record of the pandemic's profound economic impact on Wyoming’s diverse local economies and will help substantiate your claim. 

Professional Tips for Handling Your Employee Retention Tax Credit Audit

Navigating an Employee Retention Tax Credit (ERTC) audit can be challenging, but with the right preparation and strategies, businesses can manage the process effectively and maximize their potential benefits. Here are essential tips and tricks for successfully handling ERTC audits:

Understand the Requirements

The first step in preparing for an ERTC audit is to thoroughly understand the eligibility criteria and the specific documentation requirements. The ERTC is designed to support businesses that kept employees on the payroll during COVID-19 disruptions. To qualify, businesses must demonstrate a significant decline in gross receipts or that they were affected by government-mandated shutdowns. Familiarizing yourself with these requirements will help you ensure that all claims are accurately substantiated.

Maintain Meticulous Documentation

Documentation is the cornerstone of a successful ERTC audit defense. Maintain detailed records of all relevant financial transactions, including payroll records, bank statements, and accounting books that corroborate your ERTC claim:

Payroll Documentation: Keep all records related to payroll processing and payments, as these are crucial for proving the wages paid to employees during the eligible periods.

Proof of Business Disruption: Collect and organize documents that demonstrate how your business was impacted by COVID-19, such as emails, memos, and public announcements by local or state governments that led to business closures or reduced operations.

Financial Statements: Ensure that financial statements clearly show the decline in revenue during the affected quarters compared to the same quarters in previous years.

Use Professional Accounting Software

Leveraging professional accounting software can simplify the process of organizing and maintaining financial records. Many modern software platforms offer features that can track employee wages and generate detailed reports that are invaluable during an audit. Ensure that your software is up to date and capable of providing the detailed financial information that the IRS might request.

Conduct a Mock Audit

Before facing an actual IRS audit, consider conducting a mock audit. This can provide a valuable rehearsal opportunity for your team. Hire an external auditor or use internal resources to simulate the IRS auditing process. A mock audit can help identify any gaps in your documentation or processes that might be red flags to an IRS auditor.

Develop an Audit Response Plan

Having a structured response plan in place can significantly reduce the stress of an audit. This plan should outline the steps to be taken when an audit notice is received, designate who will be responsible for communicating with the IRS, and detail how documents and evidence will be gathered and presented. It should also include protocols for protecting the privacy of the data being shared.

Consult with a Tax Professional

Even if you have a competent internal team, consulting with a tax professional who has experience with ERTC audits can provide additional reassurance and expertise. Tax professionals can offer insights into the latest developments in tax law and IRS auditing practices. They can also represent your business during the audit, handling complex queries and negotiations with the IRS on your behalf.

Stay Informed About Changes

Tax laws and guidelines can change frequently, especially those relating to newer programs like the ERTC. Stay informed about any updates or changes to the ERTC program that could affect your eligibility or the audit process. The IRS website, tax news feeds, and your tax professional are valuable resources for the latest information.

Be Proactive

Do not wait for the IRS to point out discrepancies. Regularly review your ERTC claims and underlying documentation. If you find errors, address them proactively by amending past claims. This shows good faith in compliance and can mitigate penalties during an audit.

Keep Communication Open and Honest

During the audit, maintain open and honest communication with the IRS. Be transparent about your business operations and how they were affected by the pandemic. Clear communication can help ease the process and establish a cooperative relationship with the auditor.

Conclusion

An ERTC audit doesn't have to be a daunting experience. With thorough preparation, proper documentation, and the right guidance, you can navigate through it successfully. Remember, the key to a smooth audit process is preparation, transparency, and professional support. By following these tips and tricks, your business can effectively defend its ERTC claim and continue to benefit from this critical support program.

 

"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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