The Latest on ERC Claims: What Tax Professionals and Business Owners Should Know Now

Years after its enactment, the Employee Retention Credit (ERC) continues to be a hot topic today. Many businesses, in fact, still have outstanding ERC claims, and the IRS is increasingly focusing on reviewing the validity of these claims. The IRS is currently assessing both ERC claims that have yet to be processed and those that have been paid. Here’s what you need to know now to stay informed and be prepared for 2025.

2025 Outlook for ERC Claims

At the end of 2024, the IRS was still burdened with a significant backlog of unpaid ERC claims. According to recent reports, about 1.2 million ERC claims remain to be processed by the IRS, with some businesses waiting over a year for IRS action. In December 2024 while speaking at a conference, former IRS Commissioner Werfel announced that the IRS expects to approve and pay 500,000 to 600,000 claims. This would leave approximately the same number of claims remaining unapproved (or unpaid). What isn’t clear is whether these unpaid claims will be denied or subject to further review by IRS. 

Increased IRS scrutiny over possible fraudulent or ineligible claims has slowed the process, causing frustration among taxpayers that believe they have filed legitimate claims. Note that it is the business owners’ responsibility to track their ERC submissions’ progress and maintain accurate documentation. Businesses with outstanding claims should make sure they accumulate all required ERC documentation. They should also consider consulting with a tax professional to review their ERC support or to assist with IRS inquiries.

Latest IRS Developments with the ERC

Unpaid ERC Claims. IRS auditors are scrutinizing every ERC claim to ensure its validity. Their focus is to verify whether businesses met ERC eligibility criteria and if the amounts claimed were calculated correctly. For businesses and tax professionals, this means increasing attention to detail is vital. Additionally, to date, the IRS has issued approximately 100,000 letters of partial or full disallowance of ERC claims. Taxpayers have up to two years to respond. However, the IRS reported that only 2,000 taxpayers have responded to these ERC denials, indicating the remaining taxpayers are either delayed in responding or have accepted the IRS findings. It should be noted that some of these IRS letters have an immaterial change to the claim and do not warrant a response. Expect more of these IRS disallowance letters for ERC claims in 2025.

Paid ERC Claims. While the recent focus has been on the backlog of unpaid claims, the IRS has previously indicated they intend to review and potentially recapture previously paid ERC claims that are determined to be improper. The three-year statute of limitations for 2021 ERC claims filed on Forms 941-X will expire on April 15, 2025, unless other statutes apply that would extend that date. It is possible the IRS will initiate a process to audit these previously paid 2021 claims prior to that date.

In the event a full or partial disallowance letter is sent before the expiration of the statute, this disallowance letter effectively extends the statute for two years to allow the taxpayer to respond. In anticipation of efforts to recapture improperly paid claims, proposed regulations were issued in July 2024 to allow the IRS to recapture payroll related refund claims, with interest.

Tax Controversy. During 2024, taxpayers and their advisors sought legal action to force the IRS to pay ERC claims that have been delayed. So far, taxpayers have been unsuccessful in these efforts, but there are other cases still pending.

In response to a recent taxpayer matter, the IRS made a surprising concession that key guidance issued in IRS Notice 2021-20 simply serve as interpretive rules. Certain eligibility requirements cited in Notice 2021-20 were considered safe harbors by the IRS, leaving taxpayers and their advisors to interpret the facts and circumstances to determine eligibility. Thus, some taxpayers who can document the basic eligibility requirements of the ERC may qualify for the credit regardless of the significance of impact from a government order.

ERC Documentation Reminders

As noted above, taxpayers need to document compliance for ERC claims, both paid and unpaid. Key areas under review include:

• Proper documentation of pandemic-related revenue declines and/or government orders resulting in a full or partial shutdown of the business. It is critical that taxpayers retain documentation to support the impact of their shutdown, regardless of how significant the impact might have been. 
• Accurate calculation of qualified wages paid to employees during the relevant periods.
• Accurate allocation and ERC adjustment for any PPP loans received by the business.  
• Proper compliance with updated ERC rules and avoiding duplicate claims with other pandemic relief programs, including PPP loans.

Be Prepared

Business owners should continue working with their tax advisors to gather and maintain thorough records to support their ERC claims. IRS auditors are actively analyzing ERC claims to determine its legitimacy, and it is imperative that tax professionals stay current on IRS announcements regarding timelines and additional guidance for resolving outstanding ERC issues.

Why It Matters

The purpose of the ERC was to provide a lifeline to businesses impacted by the pandemic, and some organizations are still recovering and counting on this ERC relief. The IRS is thorough in verifying the validity of every ERC claim and scrubbing out fraud and abuse. This cautious process is essential to maintaining the program’s integrity, while still allowing for legitimate claims.

Tax professionals and business owners should remain vigilant in their ERC compliance efforts and monitor the latest IRS guidance and court cases. Please contact our ERC experts to review your documentation related to an ERC refund or to assist with IRS correspondence related to a paid or unpaid claim.

About Our Authors

Andrew Creedon, CPA, CFE, has deep audit and consulting experience, specializing in assurance services, internal controls, financial process improvement, internal audit, compliance, fraud investigations, and litigation consulting and support. He serves nonpublic entities, government contractors, not-for-profits organizations and public sector businesses.

Jim Brandenburg, CPA, MST, possesses extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.

Kellie Fedkenheuer, CPA/CFF, CFE, oversees and manages litigation support, forensic accounting and consulting engagements. She has assisted government agencies, government contractors, and commercial clients with claims related to both public and private projects.

Tom Bayer, CPA, CExP, has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He has deep experience providing a range of accounting, tax, and business advisory services to commercial clients across industries.