ERC Audits: How to Handle Them and Respond to the IRS

The Employee Retention Credit (ERC) aimed to help businesses stay afloat during the pandemic. For many, it served it’s purpose and did just that. But unfortunately, too many businesses filed claims they shouldn’t have, often because of pushy promoters who promised “free money.”

Fast forward to today, ERC audits are ramping up and even legitimate business owners are finding themselves under a microscope.

If your company claimed the ERC, you might be selected for an audit. That doesn’t mean you did anything wrong, but it does mean you need to be prepared.

Why the IRS is Focusing on ERC

Think of the ERC as both a lifeline and a hot target. Billions of dollars went out the door, and the IRS wants to make sure it all went where it was supposed to. They’ve trained hundreds of staff specifically to review ERC claims. Large claims, unusual filings, or anything that doesn’t line up with payroll records are getting a closer look.

One of the biggest triggers they're looking out for are promoters. If you worked with one of those firms that sent mailers or called you out of the blue saying “everyone qualifies,” the IRS is going to pay attention.

ERC schemes have even earned a spot on the IRS’s annual “Dirty Dozen” list of tax scams, which highlights the most misleading practices taxpayers should be aware of. This puts ERC claims squarely under the microscope for enforcement.

What an ERC Audit Looks Like

All the audits will not happen the same exact way. The IRS might send you a letter asking for payroll reports, or they might schedule a video call to walk through your numbers.

In more complicated cases, an auditor could even show up right to your business.

What they’ll want to see:

• Payroll records and W-2s
• Proof of revenue decline or government shutdown orders
• How you calculated “qualified wages”
• Whether you used PPP or other relief funds for the same payroll

It’s not just about the credit though! Sometimes these audits get into other payroll tax areas, so expect some broader questions too.

How You Should Prepare as a Business Owner

The best way to survive an ERC audit is to get organized and be prepared. Think of it as an open book test - you have all of your notes and you get to use them.

Here’s what we suggest:

• Keep your paperwork tight. Payroll reports, revenue comparisons, and government orders should be organized and easy to pull.
• Know your math. Be ready to explain exactly how you got to your ERC amount.
• Don’t ignore the IRS, respond to notices quickly! Silence or delays make things worse.
• Get professional help. If you worked with a tax pro when you filed, loop them back in. If you didn’t, now is the time to find one.
• Stay calm! An audit doesn’t automatically mean penalties. Cooperation goes a long way and this is why you want to be prepared.
  
  

What's at Stake?

If the IRS decides your claim doesn’t hold up, you may face consequences, like:

• Paying the credit back, with interest
• A 20% accuracy penalty for mistakes
• Up to 75% penalties if they think it was fraudulent
• In rare cases, criminal charges. Criminal tax evasion can hold a fine of $100,000 for individuals and $500,000 for corporations.

Even if fraud isn’t on the table, sloppy or incomplete records can still cost you. So we’ll say it again for good measures, be prepared!

ERC Audits Are Here to Stay
(For Now, At Least)

ERC audits are not going away anytime soon.

The good news? Businesses that truly qualified and kept their paperwork in order should come out fine.

The bad news? If your claim was based on shaky advice, now’s the time to fix it before the IRS does it for you.

At MegaPay, we recommend reviewing your ERC claim with a trusted payroll or tax professional, keeping your records airtight, and responding quickly if the IRS comes knocking.

An audit is stressful, but it doesn’t have to be devastating if you’re prepared.