Preparing for an IRS ERC Examination

A company could qualify for the credit either through a significant decline in gross receipts compared to the same quarter in an earlier period, which is a straightforward numbers test, or through a full or partial suspension of operations due to a government order, which is a much more fact-specific and frequently misapplied test. Many disputed claims relied on the government order path with a thin or generic justification, arguing that a broad public health order suspended operations when the actual operational impact on that specific business was minimal or nonexistent. If your claim relied on the suspension test, that's the piece worth reviewing hardest.

An examination typically asks for the specific government orders you relied on, a written explanation of how each order actually suspended or partially suspended your specific operations, not just industry-wide guidance, the underlying gross receipts calculation if that was your basis, and payroll records showing exactly which wages were used in the credit calculation. Generic industry guidance from a promoter, without your company's own operational facts tied to it, generally doesn't hold up as documentation on its own.

Also expect a request for whatever contemporaneous evidence exists that the order actually changed how you operated: reduced hours you actually posted, a capacity limit you actually enforced, staff you actually sent home. A written narrative produced years after the fact, with no contemporaneous evidence backing it up, carries much less weight than something documented while the disruption was actually happening.

Assemble these items before an examination letter arrives:

• The specific government orders you relied on, plus a written explanation of how each one suspended or partly suspended your own operations.
• The gross receipts calculation, if a decline in receipts was your basis for eligibility.
• Payroll records that support the qualifying wages you included in the credit.
• An allocation showing that wages used for Paycheck Protection Program loan forgiveness weren't also used to claim the credit.
• An aggregation analysis for related companies under common ownership, testing eligibility as if they were one employer.

Wages used to justify Paycheck Protection Program loan forgiveness can't also be used to claim the credit; the same dollar of wages can't support both benefits. If your company received a PPP loan, your file needs to show how you allocated wages between forgiveness and the credit calculation without any overlap. This is one of the most common technical errors examiners find, not because companies tried to double dip deliberately, but because the two calculations were often done separately by different advisors without reconciling against each other.

If your company has common ownership with other entities, aggregation rules generally require you to test eligibility and calculate the credit as if the related companies were one employer, not separately. A claim that looked eligible when tested on a single entity's numbers can fail once the related entities are combined, particularly on the gross receipts decline test. Confirm whether any of your entities share enough common ownership to trigger aggregation before defending a claim on a standalone basis.

The IRS generally has a longer window to examine ERC claims for later quarters than the standard lookback period that applies to most other tax positions, so don't assume a claim is safe just because it's been a few years since you filed it. Build your ERC support file now, while the people who made the original eligibility determination are still around to explain it, rather than waiting for an examination notice to start reconstructing the reasoning.

The IRS has offered mechanisms at various points for employers to voluntarily correct an overclaimed credit on more favorable terms than waiting to be caught in an examination, though the specific programs and their terms have changed over time, so confirm what's currently available with a tax advisor rather than assuming a prior program is still open. Waiting quietly and hoping an examination never comes is the worst version of this decision: penalties and interest generally keep accruing, and a voluntary correction almost always lands better than a forced one.