ERC Audit Process

ERC is a refundable employment tax credit for eligible employers that paid qualified wages
to some or all of its employees between March 12, 2020, and December 31, 2021.

Assuming the other ERC eligibility requirements are met, there are three ways a business may be considered an eligible employer for purposes of ERC:

Qualified wages are defined in terms of the average number of full-time employees that an employer had during 2019. For calendar quarters in 2020, the Credit is limited to 50 percent of the qualified wages the employer paid with respect to each employee for that calendar quarter. For calendar quarters in 2021, the Credit is limited to 70 percent.

The Information Document Request (“IDR”) (Form 4564), which is included with Letter 6612 requires employers to submit documentation for every quarter for which ERC was claimed, including:

For any quarter claimed under the full- or partial-suspension test, documentation showing that business operations were fully or partially suspended due to governmental orders, including:

For any quarter claimed under the gross receipts test, documentation supporting the required decline in gross receipts, a written explanation of how eligibility was determined, and how the aggregation rules under § 448 and § 414(m) were applied.

Documentation showing that ERC was not claimed for wages taken into account for other COVID-19 relief programs, such as the Paycheck Protection Program (“PPP”), the Shuttered Venue Operators Grant (“SVOG”), Restaurant Revitalization Fund (“RRF”), for paid sick and family leave credits under the Families First Coronavirus Response Act (“FFCRA”), or any other payroll tax credits.

Documentation relating to PPP loans received, including:

Application for PPP loan forgiveness (Form 3508);

PPP loan forgiveness letter received from lender or SBA;

Information regarding the PPP covered period, PPP loan disbursement amount, total PPP reported payroll costs during the covered period, and total wages during the covered period;

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.

Copy of the amended income tax return showing the entity reduced the amount of claimed wage expense by the amount of ERC;

March 2025 Update: The IRS announced that businesses who received their ERC refund after the year wages were paid may now make this wage deduction correction on the income tax return for the year the refund was received, rather than amending prior-year returns.

For employers with more than 100 full-time employees in 2019 who claimed ERC for 2020 quarters, documentation showing ERC was claimed solely for wages paid to employees who were not performing services;

For employers with more than 500 full-time employees in 2019 who claimed ERC for 2021 quarters, documentation showing ERC was claimed solely for wages paid to employees who were not performing services;

For any ERC claim relating to wages paid to employees related to majority owners, identification of the employees and their relationship to the majority owner. This includes employees related to persons deemed to be majority owners under attribution rules under § 267(c) of the Internal Revenue Code.

Consider obtaining a second opinion if the following circumstances apply to you and the company that assisted you with your ERC claim did not address the following with you: