Full or Partial Suspension
Operations were fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during the relevant quarters in 2020 and 2021.
ERC Audit Defense
ERC Audit Process
The ERC is a refundable employment tax credit for eligible employers that paid qualified wages to some or all of their employees between March 12, 2020, and December 31, 2021.
Get in TouchEligibility
Three Ways to Qualify as an Eligible Employer
Assuming the other ERC eligibility requirements are met, there are three ways a business may be considered an eligible employer for purposes of the ERC.
Decline in Gross Receipts
The business experienced a significant decline in gross receipts during the relevant calendar quarters compared to the same quarter in 2019.
Recovery Startup Business
The business qualifies as a Recovery Startup Business under the criteria established for the 2021 program.
Qualified wages are defined in terms of the average number of full-time employees an employer had during 2019. The credit is limited to:
50% of qualified wages per employee for each 2020 calendar quarter
70% of qualified wages per employee for each 2021 calendar quarter
The Audit Begins
Letter 6612 & the Information Document Request
The Information Document Request (“IDR”) on Form 4564, included with Letter 6612, requires employers to submit documentation for every quarter for which the ERC was claimed.
What you produce — and how well it's organized — often determines the outcome of the audit. Below is what the IRS typically requests.
Suspension Test
For quarters claimed under the full- or partial-suspension test
Documentation showing operations were fully or partially suspended due to governmental orders, including:
- The applicable governmental orders, with the specific provisions highlighted.
- A written explanation of how each governmental order either suspended a more than nominal portion of business operations or had a more than nominal effect on business activities.
- Contemporaneous business records demonstrating the full or partial suspension — such as meeting minutes and correspondence to employees, customers, or vendors.
Gross Receipts Test
For quarters claimed under the gross receipts test
- Documentation supporting the required decline in gross receipts.
- A written explanation of how eligibility was determined.
- How the aggregation rules under § 448 and § 414(m) were applied.
No Double-Dipping
Wages not claimed under other COVID-19 relief programs
Documentation showing the ERC was not claimed for wages already taken into account for other relief, such as:
- Paycheck Protection Program (PPP)
- Shuttered Venue Operators Grant (SVOG)
- Restaurant Revitalization Fund (RRF)
- Paid sick & family leave credits (FFCRA)
- Any other payroll tax credits
PPP Loans
Documentation relating to PPP loans received
- Application for PPP loan forgiveness (Form 3508).
- PPP loan forgiveness letter received from the lender or SBA.
- The PPP covered period, loan disbursement amount, total reported payroll costs during the covered period, and total wages during the covered period.
Tax Returns
Income & employment tax returns
- Copies of income tax returns, employment tax returns, and Forms W-2. If the employer is part of an aggregated or affiliated group, the returns for each member of the group must be submitted.
- A copy of the amended income tax return showing the entity reduced its claimed wage expense by the amount of the ERC.
Large Employers
Wages paid to employees not performing services
- Employers with more than 100 full-time employees in 2019 who claimed the ERC for 2020 quarters: documentation showing the ERC was claimed solely for wages paid to employees who were not performing services.
- Employers with more than 500 full-time employees in 2019 who claimed the ERC for 2021 quarters: the same documentation, applied to the 2021 quarters.
Majority Owners
Wages paid to employees related to majority owners
- For any ERC claim relating to wages paid to employees related to majority owners: identification of those employees and their relationship to the majority owner — including employees related to persons deemed majority owners under the attribution rules of § 267(c) of the Internal Revenue Code.
Red Flags
Consider Obtaining a Second Opinion
If any of the following apply to you — and the company that assisted with your ERC claim did not address it with you — it may be time for a second opinion.
- You have ownership in multiple businesses, multiple people who own your business may have interests in other businesses, or your business owns an interest in another business — and you were not asked for that information, or you do not know what aggregation is.
- Your business averaged more than 100 full-time employees in 2019 and you filed ERC claims for 2020 quarters claiming wages paid to employees who were providing services.
- Your business averaged more than 500 full-time employees in 2019 and you filed ERC claims for 2021 quarters claiming wages paid to employees who were providing services.
- Your business was suspended by governmental orders, but the company that assisted with your claim did not provide you with the governmental orders or a nominal-portion / nominal-effect analysis.
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