While it may not be as glamorous as a balayage or as captivating as a sleek blowout, retaining the proper documentation to substantiate your Employee Retention Credit (ERC) claim is crucial for salon owners and independent stylists. With ERC audits set to rise, maintaining financial wellness depends on substantiating these claims.

Imagine sorting through business mail when you spot an IRS letter - your ERC claims are under audit, with an extensive Information Document Request (IDR). Your first instinct may be panic, but instead, you vividly recall this guide unraveling the mystery of how to substantiate ERC claims, one strand at a time.

An IDR, formally known as Form 4564, from the IRS is a formal inquiry sent to taxpayers during the course of an audit or examination. It is the IRS's way of asking for specific documentation, records, or other information during a tax audit. These requests can vary widely depending on the complexity of the audit and the issues under review.

Typically, an IDR will outline the specific documents or information the IRS is seeking, along with a deadline for the taxpayer to provide the requested materials. The IRS uses IDRs to gather evidence and substantiate the accuracy of a taxpayer's reported income, deductions, credits, or other tax-related items.

Responding to an IDR is a crucial part of the audit process, as failure to provide requested documentation in a timely manner can lead to your ERC claims being disallowed. Therefore, taxpayers should carefully review each IDR they receive and work with a tax professional experienced with ERC to gather and submit the requested information accurately and promptly.

While each IDR may vary depending on the complexity of the audit and the specifics of your business, the following list includes what most individuals or businesses will need to provide (where applicable):

1. Tax Forms

  • Q2 2020 - Q4 2021 Payroll Tax Returns (i.e. 941, 941-X, etc.)
  • 2020 - 2021 Federal Income Tax Returns;
  • Forms 2020 and 2021 Forms W-2;
  • 941/941-X Worksheet 1 used to compute the ERC;
  • If your business is part of an aggregated or affiliated group, the above mentioned forms for each member of the group.

2. Business Records

  • 2020 - 2021 Quarterly breakdown of wages paid, broken down per employee (where applicable);
  • 2019 - 2021 Quarterly Profit & Loss or Income Statements;
  • Name of majority owner and blood relatives and/or spouse;
  • Names of employees who were paid wages for which the ERC was claimed;
  • Breakdown of how wages were allocated between the ERC and PPP loans;
  • PPP Loan Forgiveness Application (Form 3508);
  • List of employees paid sick and/or family leave, the dates employees were on leave, and the amounts paid to each employee while on leave;
  • Qualified health plan expenses (if applicable);
  • Calculation of average full-time employee count;
  • 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.

3. Government Orders

  • Orders from appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 resulting in full or partial suspension of operations

Just like achieving perfect highlights, ERC substantiation requires precise timing, detail, and finesse. If your business claimed ERC, retaining supporting documentation is paramount - even if not audited. Currently, the ERC audit statute of limitations is three or five years, depending on the quarter at issue. However, the Tax Relief for American Families and Workers Act of 2024 has proposed increasing the ERC audit statute of limitations to six years for all applicable periods. Thus, business owners should plan to retain their ERC records for a period of no less than six years from the time the return(s) process.

Not sure where to start? Contact Azarvand Tax Law at (410) 698-4005 or book a free consultation online at AzarvandTaxLaw.com.




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