In this week's episode, Travis discusses your questions about the Employee Retention Tax Credit - "Am I Going to Get Audited?"
In this week's episode, Travis discusses your questions about the Employee Retention Tax Credit - "Am I Going to Get Audited?"
Hey, everybody! Travis Watkins here. I am a tax lawyer. I am welcoming you here to the weekly discussion on the Employee Retention Tax Credit that we do here every week. I'm a little bit late to this week's recording, but hopefully since this thing will be memorialized on YouTube, and also we started this new podcast called the ERC Masterclass Podcast, and I'm your host, Travis Watkins for that as well. You'll be able to access this, you know, in your carm on YouTube, whatever works best for you. But we got some really great questions this week, and we're getting these all the time, so keep asking them, of course. But I've kind of funneled all these down into one set of questions about the Employee Retention Tax Credit as it relates to audits. We're hearing all kinds of questions. Everybody wants to know if they're going to get audited, when that's going to happen, what that's going to look like, if they're going to be in major trouble, all those kinds of things…
So let's jump right into these and kind of dispel some of the myths, give you the facts on what it is as we know it right now. It's still early, but I think these things will really help you out. First of all, will I get audited for sure if I take the Employee Retention Tax Credit? That's one that is actually a rumor that's going around right now that you will definitely be an audit victim if you take the Employee Retention Tax Credit. And look, I mean, this whole thing about 87,000 new IRS agents coming in because of the Inflation Reduction Act that just came out. I think that's a little ambitious for the IRS to say the least. First of all, all those agents are not getting hired tomorrow or next year, or maybe in the next three to five years.
It's a 10 year plan. And really a lot of that's to counter what they've had in the past at the IRS because of some of their own shenanigans. Some of it being related to the IRS’ defunding, I guess during the Trump administration that there's been a lot of attrition at the IRS. So a lot of those 87,000 new employees are supposed to make up for the ones that have left over the last 10 years or are leaving over the next 10 years. And not all of those are being assigned to audit. Of course, they're supposed to be auditing the richest Americans, that remains to be seen. But as it relates to ERC itself, these are not going to immediately, or ever for that matter, end up being just Employee Retention Tax Credit audit employees. So I think that's a myth, that this is going to result in mass audits.
The next question we get is you know, have I done anything wrong if I do get audited by the IRS, ultimately on this? And the answer to that is no. The IRS I think it would be, I think it would be naive little Pollyanna, I guess to say the least, to think that the IRS won't audit some of these. But what they're going to be looking for, primarily because this is somewhat of a complex set of evolving rules that they'd like to check in on. And what they're going to be looking for is eligibility. Was the employer eligible from the get go to take a quarter or certain quarters of the ERC? They're going to be looking at eligibility as it relates to, well, governmental orders are pretty easy for the direct employer to prove the area that gets squishy in the IRS is even admitted. So when it comes to full or partial shutdowns, mostly partial shutdowns as it relates to supply chain disruption. That's one that they've said it's going to depend on the facts and circumstances of every case. We will cover here on this podcast in later podcasts, some real life examples and, and some things that you can kind of put in your file for any later support that you might need for the supply chain disruption. So that's kind of beyond the scope of what we're talking about here today. But just know that they're going, they could be looking at mostly partial shutdown issues. And you know, there's ample evidence of shutdowns of third parties, especially as it relates to the to the ports of import there in the Los Angeles area, just one order after another there, and just a well documented group of slowdowns, shutdowns and supply chain disruption as it relates just to that port alone.
But there's also a support that you can get for global shutdowns from Asia to Europe and beyond. There's well documented evidence of shutdowns as it relates to imports or travel or meetings that supply that chain there is well documented. But you can expect that the IRS, you know, will try to sample, try to go after a few of those to try to set some precedent there, because none really exists. We are seeing some, there have been a few audits that have come out. There's been some audits that have come out on certain applications before they even fund it, which may scare some people. I think that's a really great sign, especially since those are, those applications are still being funded. So they're looking at the applications presumably under all these different types of eligibility.
And other issues as they relate to the ERC and letting money go through, they're, they are funding them. So that's a good thing. Other areas that they may look at is significant revenue reduction. Remember the 20% for 2021, You've got to show significant reduction there, or you may have to, if you use that particular doorway into the ERC. 50% reduction for 2020, they may also look at PPP has to be deducted from your ERC calculations. That's super confusing and almost, I don't know what the word would be, almost guidelwaa. There is no real precedent for any of that other than some examples that the IRS is put in the no. IRS noticed 2020-21 had some examples, six or seven of them. But they also add to that the caveat that those are not the only ones that could ever come up.
So PPP application itself, there's, they have left a lot of leeway for the employer to run the numbers several times on their own or with their tax professional to come up with the most advantageous one. I don't think there's anything wrong with that, and I don't think that the IRS would disagree to take PPP in the most beneficial under the formats of the rules as they exist to help the employer take the most ERC credit. Other things they may look at qualified wages, which wages go into your calculation if you're called upon to do that. So those are the things that I think that they might be looking at, but they're not just because you are getting audited saying that, “Hey, you've done something wrong and hand over the money.” That's just not how, that's, that's not how any audit has ever worked.
Next question. Will the IRS audit other returns if they're auditing just the ERC? And first of all, let me say the ones that we've seen, the audits that have come through on this, which are very few, by the way, as of this date here in September, 2022. But the ones that we are seeing are, it's impossible to tell if they're just going for the ERC or if these were random audits of some sort for payroll in general, based on what types of documents that they're requesting. This does not necessarily open Pandora's box to all kinds of other returns. We hear that all the time. Questions like, “Hey, you know, I don't want to take the ERC that I'm entitled to because I'm afraid that this is going to open up this slippery slope of all kinds of issues.”
I don't think that's necessarily the case. What they may look at beyond just the ERC application and the 9 41X that you have to file in order to request ERC, they may look at the corporate return for the year that you are taking ERC to make sure that you've adjusted your corporate return for that year appropriately. And most importantly, it's, you know, you aren't going to be able to claim that just like PPP, you're not going to be able to claim all those payroll expenses if you are ultimately awarded or reimbursed for those payroll expenses as part of the Employee Retention Tax Credit. Just makes simple sense there. It's logical. They may also look at the owner's return. You know, if all those things, once you have taken away some of the business expense there of payroll, that may affect the owner distribution on a K-1. So, they may check that also. But this does not necessarily open Pandora's box to a whole, you know, carte-blanche type of audit.
Next question, will I have to pay the money back? And again, not just simply because you have been audited. There will be an audit there, there will be a shoring up of the things that you have put into your calculations, and there shall be an argument on that. And among those that know the ERC, we're all looking for these types of test audits, you know, to quite frankly to be ready to take up some of these test audits you know, to district court if necessary, certainly to tax court if that's appropriate. But you know, just the fact that this has been flagging, we don't know why they might be flagged.
They could be ERC tasked or they could just be a run of the mill audit. So doesn't mean that you have to pay all the money back. Again, some of these are being audited even before funding, which again, is a great thing. If you were to lose, that doesn't mean that you lose carte-blanche everything that every possible benefit that you got here. Again, these are applied for on individual 9 41 x I mean, individual X standalone quarter 9 41X for the business. And each one of those would be evaluated, you know, on their own merits. So this won't be a, you know, just a, Hey, you've been honored to give us all the money back plus interest. Okay? The one that you know, is kind of ruminating, I guess in everybody's mind is, with all these things and audits potentially on the way, is it worth it?
And I think at the end of the day, that it is worth it because of those ERCs that we have participated in, that we've helped with, I would say 10 or more employees in the mix, you're looking at probably an average and some higher, of course some lower of $300,000 plus thousand dollars potentially depending on what type of business it is, and you know how much you are paying your employees and what the facts and circumstances of every case are. But that's a pretty big potential benefit. So yeah, I mean, the clients that we've helped out, they're definitely seeing that it is worth doing these things, of course, doing them right. But you know, with that risk in the background, it's still ultimately worth it at the end of the day.
Next question, of course. Who's the best person to represent me now and if I get audited? So who should be doing the ERC application for me? What professional? And you know, if, if it does get audited, who's going to be the best? Well I always say, begin with the end in mind with all of these things. Start with the professional that you would feel comfortable having represent you, not only for coming up with a 9 41X, which is not any great shakes once you've done the calculations on these things, but who is standing there at the end of the tunnel, so to speak, If God forbid there is an audit? And that person, that professional, in my opinion is a tax lawyer, is a tax lawyer. CPAs are certainly qualified to do this. Non-degreed people can, can do this as well, but you have to look at the end, keep that in mind. And 99% of CPAs are not licensed to go to tax court.
They can't go fight this ultimately down the line. They certainly, unless they have a law degree and are admitted to practice in, in federal courts, they don't have the ability to take these up to any district court if there's a challenge at the end of the day. So start with a tax lawyer, have them help you do the 9 41 X, have them standing by, have them give you the pointers on all these eligibility things and help you with that calculation and the 9 41X and also, you know, have some, some tax professional, in my opinion, again, tax attorney that has been around a while doing these. And that will be here at the end of the day in three years, possibly up to five years if this thing ever gets audited. So again, choose somebody that's going to be that's still going to be around, begin with the end in mind, and put your best foot forward, keeping all those things in mind.
And most importantly, you know, don't freak out. Don't listen to all this stuff on the internet. You know, CPAs especially talking about woe is me and how terrible this program could be and unethical it could possibly be. Certainly do everything right. Do your homework on these things and make sure that you're submitting a legal and good faith, 9 41X with all the rules that you can find application for. There's not a whole lot really out there at the end of the day, other than a rehashing of possible examples that the IRS has out there. But begin with it in mind, you know, don't, don't freak out about this stuff. There is a little bit of time still here to make sure that you get the right application out there and that you get the best professional to help you get those 941Xs and be standing in the wings, helping you with support down the road. All right? Thanks for tuning in here and keep those questions coming. They are fantastic. They're just what other people like you want to know. So it, it really helps if you have the courage to go ahead and, and ask that, give us a call. 8 6 6 9 3 9 5 5 3 2 is the number. And we'll be back next week with more. Thanks for watching and listening.