What to do if you filed an employee retention credit claim with the IRS

ERC submissions are under scrutiny by the IRS due to a surge in questionable claims. Are you confident your claim meets the eligibility requirements and can stand up to a potential audit?

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What to do if you filed an employee retention credit claim with the IRS

ARTICLE | September 19, 2023 | Authored by RSM US LLP

The employee retention credit (ERC or ERTC) was originally enacted in the CARES Act in March of 2020 at the onset of the COVID pandemic. Congress acted quickly by enacting this credit to get money in the hands of employers who were continuing to pay employees despite being affected by COVID mitigation measures. Specifically, those effects were a significant decline in gross receipts (which is objective) or a full or partial suspension from government orders (which is very subjective).

Over time, the credit has been changed, and many businesses have been filing. Though the ERC ended for most on Sept. 30, 2021, many businesses continue to file because the statute of limitations is still open. Specifically, the statute for 2020 claims ends April 15, 2024 (taxpayers have another year beyond that for 2021 claims).

Determining eligibility is complex and includes careful analysis and calculation of qualified wages.

The IRS announced an immediate halt to processing ERC claims. Now what?

On Sept. 14, the IRS will discontinue processing claims for the remainder of 2023 in an attempt to limit fraudulent activity in the employee retention credit market. The IRS hopes this measure will reduce the number of fraudulent claims encouraged by third-party providers.

We expect there will be significant delays in processing ERC claims in 2024 when the IRS resumes processing procedures.

The announcement is also significant for those taxpayers who have already filed ERC refund claims but should not have due to ineligibility. Additional procedural guidance from the IRS is expected to allow taxpayers the ability to withdraw claims that have not been processed.

Further, the IRS also intends to provide guidance for those who have received refunds in error, who want to pay them back to avoid penalties and future compliance action.

Understand what options are available for submitted ERC claims

First, and most importantly, employers should work with their trusted tax professional.

The IRS provides some red flags for recognizing some of the aggressive promoters which include:

  • Unsolicited calls or advertisements
  • Statements about it being easy or determinable in minutes
  • Large upfront fees or fees based on the size of the credit

Companies that did engage parties like this should have tax professionals review their substantiation to determine whether it appears to be valid or outside the provided guidance. The IRS published some guidance in July 2023 on supply chain impacts, for example, and in cases where employers were claiming a partial suspension from supply chain impacts, the IRS is expecting to see support of specific government orders and substantiation that suppliers were impacted by those orders. This is only one area of possible impact, but it’s an example of what employers need to be prepared for if the IRS reviews their claim.

You’ve submitted your ERC claim but haven’t received payment. What’s next?

Many employers, even with valid claims, are still waiting for refunds. These entities should expect more delays in processing (even beyond what we were experiencing before) and possibly will receive additional questions from the IRS. In some cases, such entities may be pulled for exam before the IRS issues a refund. The IRS can also commence examination even after the refund is issued.

Also, taxpayers need to be aware that even if a refund is issued, if it is later deemed invalid, the IRS has two years from the date the refund was issued to commence erroneous refund claim action. Erroneous refunds are subject to a 20% penalty.

Recommendations for navigating your ERC claim

The IRS is expected to provide additional guidance for taxpayers about how to withdraw or amend an ERC claim.

If you choose to withdraw your ERC claim or pay back a previously received credit, work with a qualified tax professional to ensure the appropriate steps are taken to protect yourself from potential penalties or interest. 

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This article was written by Anne Bushman, Alina Solodchikova and originally appeared on 2023-09-19.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-strategy-operations/what-to-do-if-you-filed-an-employee-retention-credit-claim-irs.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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IRS Audit Alert: Are You Making These Common Mistakes?

Worried about getting audited by the IRS? Check out the statistics on IRS audits and tips to reduce your risk of being audited.

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IRS Audit Alert: Are You Making These Common Mistakes?

Article | September 15, 2023 | Authored by KDP LLP

The Internal Revenue Service (IRS) conducts audits to ensure both individuals and businesses are complying with tax laws and accurately reporting their income and deductions. Even though audits are relatively rare, certain income brackets and specific actions can attract the attention of the IRS. In this article, we’ll provide audit rates from the most recent IRS Data Book, along with tips to minimize your risk of audit.

IRS audit rates

Each year the IRS releases the Data Book, which provides valuable statistics on IRS audit activity. According to the data for 2019 tax returns, the likelihood of an audit increases with higher income levels. Taxpayers earning between $1 million and $5 million face an audit rate of 1.3%, while those with incomes over $10 million have close to a 9% audit rate. In comparison, the audit rate for taxpayers earning between $25,000 to $500,000 is around 0.2%. 

Estate tax returns also face more rigorous examinations compared to personal tax submissions. For the 2019 tax year, the IRS examined 1.4% of estate tax submissions, a significant contrast to the percentage of personal tax submissions inspected. 

To provide a better understanding of the likelihood of an audit and the respective factors contributing to it, we have included a table highlighting the most recent IRS audit rates based on 2019 tax returns. This table illustrates the audit rates across various income levels and the differential scrutiny of tax returns such as personal and estate tax submissions. Please note that the IRS can pursue new enforcement actions for 2019 tax returns through at least 2023, so these estimates could still change. 

Return type

Percentage of returns examined

Individual Returns

 

Returns with EITC

0.8%

No total positive income

1.1%

TPI $1-$25,000

0.4%

TPI $50,000-$75,000

0.2%

TPI $75,000-$100,000

0.2%

TPI $200,000-$500,000

0.2%

TPI $500,000-$1 million

0.6%

TPI $1 million-$5 million

1.3%

TPI $5 million-$10 million

2.0%

TPI > $10 million

8.7%

Business Returns

 

Total Corporation income tax returns

2.9%

Partnership returns

0.1%

S-corporation returns

0.1%

Estate tax returns

1.4%

How long does the IRS have to audit you? 

In general, the statute of limitations for an audit runs three years from the time you file your return. Technically, the statute of limitations clock starts running on the later of your filing date or the actual due date, so filing early will not necessarily start the clock earlier. And, if you fail to file or forget to sign your return, it is not considered a valid return, and the clock does not start until the error is resolved.

In some situations, you could face an audit up to 6 years after your return was filed or due, whichever is later. For instance, if you omitted more than 25% of your income, the statute of limitations is doubled to 6 years. If you overstated your cost basis on the sale of an asset that reduced taxable income by more than 25%, the statute of limitations is doubled to 6 years. Worse yet, there are circumstances in which the statute of limitations never runs out, meaning the IRS can audit you indefinitely. If you never file a return or file a fraudulent return, there is no time limit.

While never filing a return or filing a fraudulent return seem like obvious reasons for no time limit, there are many less obvious situations. For example, forgetting to include certain forms when required, such as Form 3520 for receiving a gift or inheritance from a non-U.S. person or Form 8938 for overseas assets causes the statute of limitations clock to not even start.

The IRS’s time limits are anything but simple, and there are many exceptions to the general three-year statute of limitations rule. This is why it’s imperative that you work with a seasoned CPA when filing your taxes, as even minor mistakes and oversights can cause an audit and lead to large civil penalties and potential criminal liability. 

Strategies to reduce audit risk

While the risk of an audit may be small, it’s important to understand common triggers for an audit and, when possible, how to avoid them.  

Report income accurately

One of the most critical steps in avoiding an IRS audit is to report all income and expenses accurately. Underreporting income can raise red flags with the IRS, increasing the likelihood of an audit. This can be triggered when the income sources and amounts reported on your tax return are inconsistent with those reported by third parties. 

Income taxes originating from regular wages are typically withheld and reported by your employer. However, non-wage earnings, such as capital gains and dividends, usually do not have taxes withheld, making them more susceptible to inconsistencies and scrutiny by the IRS. 

To ensure you accurately report all sources of income, we have compiled a table that outlines common types of income, their associated tax forms, and the deadlines by which you should receive these forms.

Type of Income

Relevant Form

Should be Received by

Regular Wages

W2

Jan. 31

Independent Contractor Income

1099-NEC

Feb. 1

Partnership Income

Schedule K1

Mar. 15

Misc. Income (e.g., rent, royalties)

1099-MISC

Feb. 1

Social Security

SSA-1099

Jan. 31

Distributions from Retirement Accounts, Pensions, Annuities

1099-R

Jan. 31

Real Estate Sale

1099-S

Feb. 15

Securities Sale

1099-B

Feb. 15

Dividends

1099-DIV

Jan. 31

Interest

1099-INT

Jan. 31

Deductions and credits

It’s important to fully understand the eligibility criteria for deductions and credits when filing your taxes. If you are unsure of your eligibility for deductions or credits or plan to claim complex deductions, it’s wise to seek professional guidance. 

Be specific when listing deductions, especially if you’re deducting things like travel, advertising, inventory, and office supplies. If any significant changes or discrepancies in your deductions occur, you can provide an explanatory statement with your return to prevent arousing suspicion. 

Avoid claiming excessive or unusual deductions, particularly for business expenses, as this can be an audit trigger. If you claim a home office deduction, make sure you understand and follow the IRS rules. The space must be used exclusively and regularly for your business, and it must be the principal place of your business. 

Also, claiming a sizable charitable tax deduction relative to your total income could draw the attention of the IRS. Be prepared to provide documentation to support any figures you report on your return, and only report the actual amount of deductions for which you are eligible.

Business Losses

It’s common for businesses, particularly new ones, not to be profitable. However, reporting losses for an extended number of years or showing a big swing in losses may attract the attention of the IRS. The underlying expectation is that a business should generate profits over the long term, and the IRS may seek explanations if this doesn’t occur. And, of course, if your business shows an unusually high loss, it could trigger a red flag. 

Double-check your tax return

Always thoroughly check your tax return for accuracy and unintentional omissions. Ensure all math and figures are correct, and confirm that you’re using the appropriate number of exemptions. Note that round numbers on your tax return can look suspicious, so it’s best to use exact amounts whenever possible. 

Make certain that all figures match up with other tax-related forms (such as your 1099 or W-2), as data entry errors are a frequent red flag for auditors. While the IRS’s automated system will detect discrepancies, it won’t be apparent whether the discrepancy was accidental or intentional.

Electronic filing

Timely, electronic submission of your tax return can also reduce the likelihood of an audit. The error rate for a paper return is significantly higher than that for returns filed electronically, mainly because tax software helps to correct errors. By filing electronically, you are less likely to make errors and more likely to avoid an audit.

Understanding the frequency of IRS audits and common triggers can help reduce the likelihood of an audit. While this article provides insights on audit rates and strategies to reduce your risk, there’s no substitute for personalized advice based on your unique situation. If you have any questions or would like assistance with your tax return, please contact our office to speak with one of our expert advisors.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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KDP Certified Public Accountants, LLP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890.

10 Warning Signs Your Nonprofit’s Financial Health is in Jeopardy

Protect your nonprofit organization from financial crises with these expert tips for board members and directors. Discover the warning signs of financial mismanagement and how to prevent them.

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10 Warning Signs Your Nonprofit’s Financial Health is in Jeopardy

Article | September 14, 2023 | Authored by KDP LLP

The financial health of a nonprofit is the cornerstone of its ability to serve its mission. Key to maintaining this financial health is the role of board members and directors, who are responsible for overseeing the organization’s financial landscape. 

This oversight involves understanding and interpreting nonprofit financial statements, recognizing financial red flags, and ensuring effective financial management practices.

Understanding the nonprofit financial landscape

Understanding the nonprofit financial landscape is not just a duty but a necessity for board members and directors. It equips them to make informed decisions, ensure the organization’s financial health, and uphold the trust placed in them by donors, members, and the community at large. 

Nonprofit financial statements provide a snapshot of an organization’s financial health and activities. They are a tool for both internal management and external stakeholders. The three primary components of a nonprofit financial statement include:

  1. Statement of financial position (balance sheet): this provides a picture of the organization’s financial status at a specific point in time. It details the organization’s assets, liabilities, and net assets.
  2. Statement of activities (income statement): this document shows the organization’s income and expenses over a specific period. The statement includes details on revenues, expenses, and changes in net assets.
  3. Statement of cash flow: this report demonstrates how changes in the balance sheet and income statement affect cash and cash equivalents. It breaks down the cash inflow and outflow into three categories: operating activities, investing activities, and financing activities. 

Nonprofit organizations also have unique accounting features that are distinct from for-profit businesses. These features primarily revolve around the organization’s revenue sources and expenditure classifications: 

  1. Donations and grants: donations and grants may have donor-imposed restrictions and stipulations. Tracking and reporting these revenues requires meticulous attention to ensure compliance with the restrictions as well as proper reporting. Nonprofits are required to present donor-restricted net assets (purpose, time, or permanent/endowment net assets) separately from net assets that are not donor-restricted and available for general expenditure of the organization. 
  2. Statement of functional expenses: Nonprofits are required to categorize their expenses into three main categories: program expenses, management and general (administrative expenses), and fundraising expenses. Certain nonprofits may also need to present membership development expenses.
  3. In-kind contributions: Nonprofits often receive non-cash donations, which are typically recognized and valued in the organization’s financial statements.

Identifying nonprofit financial red flags

Awareness of potential financial red flags can be the difference between guiding your nonprofit successfully forward or unknowingly leading it into financial distress. Here are some of the most common warning signs that board members and directors should watch out for:

Inadequate reserves

Reserves act as a financial safety net for an organization. If your nonprofit consistently has insufficient funds set aside to cover unexpected costs or revenue shortfalls, this could indicate financial instability. A healthy reserve usually covers at least three to six months of operating expenses or at least 25% of your annual expenses. Certain nonprofits may require a larger reserve based on operations. 

To determine the number of months your organization could continue to operate using only reserves, you’ll want to look at the operating reserves ratio. It can be calculated by dividing net assets without donor restriction (those not earmarked for a specific purpose) by monthly expenses. A higher ratio suggests greater financial stability.

Continuous deficit spending

Operating occasionally at a deficit may not be a significant problem, especially if it’s part of a planned strategy. However, continuous deficit spending, where your expenses regularly outpace your income, is a red flag. This could lead to the gradual depletion of reserves and, eventually, financial insolvency. 

To determine your organization’s ability to meet its short-term financial obligations, you’ll want to find your current ratio. This is calculated by dividing current assets (those that can be converted to cash within a year) by current liabilities (those due within a year). A current ratio of 1 or more suggests that your organization can cover its short-term liabilities.

High dependency on a single revenue source

If a substantial portion of your funding comes from a single source, such as a specific donor, grant, or fundraising event, it could indicate a risk for the organization. Losing that source could critically destabilize your organization. It’s always healthier to have diversified revenue streams.

Rapid growth or decline in finances

Rapid changes in your financial status, whether growth or decline, may indicate potential issues. A sudden surge in funds could mask underlying problems or create them if not managed properly. On the other hand, a swift decline in income or sudden increase in expenses might signal financial trouble on the horizon.

Excessive debt

Like businesses, nonprofits can take on debt as part of their financial strategy. However, high levels of debt can burden the organization and potentially threaten its sustainability. The ability to service the debt is key.

Overly complex transactions

If your organization engages in transactions that are hard to understand or explain, this could be a red flag. Complex deals may expose the organization to risks that are difficult to identify and manage. They may also raise concerns among auditors and regulators, potentially damaging your organization’s reputation. 

These red flags are not definitive proof of financial wrongdoing or impending collapse, but they are signals that deserve attention. By recognizing and responding proactively to these warning signs, board members and directors can steer their nonprofits away from potential pitfalls and towards financial stability.

Analyzing nonprofit financial health indicators

Quantitative measurements can highlight potential issues and offer comparative data against benchmarks or similar organizations. Here are two key indicators board members and directors should regularly review:

Fundraising efficiency

This indicator measures the cost-effectiveness of an organization’s fundraising activities. It’s calculated by dividing fundraising expenses by total contributions. A lower ratio indicates that the organization is more efficient at raising funds. Charity Navigator (an organization that evaluates nonprofits and provides donor transparency in the U.S.) generally gives its highest ratings to organizations that spend less than $.10 for every dollar raised.  

Program expense ratio

Also known as the program efficiency ratio, this indicator assesses how much of the organization’s total expenses are devoted to its core mission. It’s calculated by dividing total program expenses by total expenses. A donor/grantor generally views a higher ratio as better, as it suggests that more of the organization’s funds are being used to directly further its mission. Many nonprofits aim for a program expense ratio of 75% or higher. However, since each organization is unique, the nonprofit may find it more helpful to benchmark against its own historical ratios. 

Effective financial management practices for nonprofits

By adopting effective financial management practices, your nonprofit can not only weather financial challenges, but also seize opportunities to strengthen its mission.

Regular external audits

Regular external audits provide an objective assessment of your financial practices and help ensure compliance with accounting standards and legal requirements. They can uncover discrepancies, identify areas for improvement, and provide reassurance to donors and other stakeholders about your financial integrity. 

Regular financial monitoring, reporting, and compliance

Consistently keeping an eye on your organization’s financial status helps identify trends, red flags, and opportunities. Regular reports should be provided to the board, including updates on income, expenses, cash flow, and comparisons to the budget. For optimal oversight, the board should receive and review these financial statements on a quarterly basis at the very least, although monthly reviews are preferable. 

Furthermore, adherence to regulations, particularly those mandated by the IRS, plays a pivotal role in preserving your nonprofit status. This includes the timely filing of Form 990 with the IRS every year. Please bear in mind that failing to file your 990 for three consecutive years will result in the loss of your tax-exempt status.

Diversification of revenue sources

As the saying goes, don’t put all your eggs in one basket. A healthy mix of funding sources, such as individual donations, grants, corporate sponsorships, fundraising events, and fee-for-service income can help safeguard your nonprofit from the loss of any single revenue source.

Implementing strong financial controls

Strong financial controls include procedures to prevent fraud and mismanagement, such as segregation of financial duties, approval processes for expenditures, and regular reconciliation of bank statements. Strong financial controls not only protect your organization’s resources but also boost confidence among your stakeholders. 

Consider outsourced accounting

When accounting tasks are performed by undertrained individuals or without professional accounting software, risks escalate. Outsourcing accounting functions can help with these concerns. By outsourcing, your organization gains access to expert knowledge in nonprofit financial management. Outsourced teams can provide accurate, compliant, and timely financial records, bringing consistency to your operations. 

Board’s role in navigating financial red flags 

The board plays a crucial role in managing financial risks. This involves developing a financially literate board where all members have a basic understanding of nonprofit financial statements and indicators. You may even consider providing new board members with mentors to help them better understand the organization’s procedures. 

Furthermore, the board should cultivate an environment where asking challenging questions is welcomed. Questions about unexpected budget variances, fundraising efficiency, the rationale for financial decisions, and potential financial risks can lead to more robust discussions and better decisions.

This article is intended to provide a brief overview of nonprofit financial red flags. It is not a substitute for speaking with one of our expert advisors. For more information, please contact our office.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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KDP Certified Public Accountants, LLP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890.