IRS Compliance – Upcoming ERC Audits

In connection with its recent warning, the IRS is preparing for a major compliance enforcement effort of ERC refund claims. Recently, the IRS Small Business/Self-Employed Division has begun training 300 examiners to examine ERC refund claims.

Last month, the Commissioner of this IRS Division, told tax practitioners that the IRS is encouraging taxpayers to take advantage of the credit, but that the IRS is “monitoring the situation very closely.” She said the warning signs of these schemes include large upfront fees, advertised solicitations and suggestions that businesses have nothing to lose by submitting these claims. As of February 14, 2023, the IRS Criminal Investigation division has initiated 44 investigations into ERC fraud that include aggressive ERC promoters and enablers. Eleven individuals have been charged to date.

In its examination of questionable ERC claims, the IRS likely will focus on three areas; eligibility, substantiation of the amount claimed and whether an amended income tax return was filed to correct any overstated wage deduction.

A particular focus of the IRS will be on substantiating qualifications based on a partial suspension of business operations, which requires a taxpayer to demonstrate that a government order interrupted at least a portion of its business operations. Additionally, the order must be more than a recommendation and the shutdown order must have impacted business operations by a more than nominal amount.