In 2022, the Internal Revenue Service (“IRS”) publicly released a Training Manual intended to serve as reference material for IRS examiners and agents tasked with administering the Employee Retention Credit (“ERC”) field audits and related matters. Tax practitioners, including those of us at Sagemont Advisors, were pleased to see that there were no material deviations from the most substantive and comprehensive guidance that we have relied on for well over a year. It was similarly reassuring to see the IRS send a signal that their auditors should be at least starting with the same “rules of the road” as the employers and their advisors that have already pursued, or intend to pursue, the ERC.

Download the Practical Guide to Navigating an ERC Audit

While the Training Manual is sure to provide IRS examiners a 30,000-foot view of the ERC, the Training Manual, and related Notices, are intentionally more conceptual in nature. Sagemont Advisors’ Practical Guide intends outlines how employers and advisors should prepare to successfully substantiate an ERC claim with the IRS. The authors of this manual include highly experienced “big firm” CPAs and attorneys with decades of tax advisory experience.

To mitigate audit risk and general noncompliance, Sagemont Advisors recommends that taxpayers filing for the ERC perform a thorough assessment and maintain adequate and complete documentation substantiating eligibility and the underlying calculation. Regardless of the strength of an eligibility position, taxpayers should be prepared for the IRS to examine their filing since their underlying ERC analysis is not provided with the payroll tax returns and, therefore, the strength of an eligibility position may not be inversely proportionate with the risk of being selected for an IRS audit. Noncompliance identified by the IRS may lead to penalties, interest, and having to repay amounts received.