The Employee Retention Credit (ERC), also known as the Employee Retention Tax Credit (ERTC), was introduced during the COVID-19 pandemic to help businesses keep employees on their payroll. Although the credit applied to wages paid in 2020 and 2021, its effects are still being felt in 2025. Businesses have faced delays in receiving refunds, and the Internal Revenue Service (IRS) has been working to address fraudulent claims.
What the ERC Was Intended to Do
The ERC was established to provide financial relief to businesses that retained employees despite experiencing financial hardships due to the pandemic. It was a refundable payroll tax credit, meaning businesses could receive cash back even if they had little or no tax liability.
Initially, the credit offered up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for the first three quarters of 2021. To qualify, businesses needed to show a significant drop in gross receipts or that they were partially or fully suspended by government orders during the pandemic.
Although the program was set to run through the end of 2021, Congress ended it early through the Infrastructure Investment and Jobs Act in November 2021. This legislation made the third quarter of 2021 the last eligible period for most employers, with an exception for “recovery startup” businesses. These newer companies with limited gross receipts still qualified through the fourth quarter of 2021.
A Surge in Claims and a Wave of Problems
Over time, the ERC became one of the most heavily promoted tax credits in U.S. history. Third-party firms began advertising aggressively, promising large refunds with minimal effort. This led to a dramatic spike in applications, many of which were based on questionable interpretations of eligibility.
By late 2024, the IRS had received over 3.6 million ERC claims and had more than 1.2 million still awaiting processing. According to the National Taxpayer Advocate, many businesses had been waiting more than a year for their refunds.
In response to the surge in suspicious claims, the IRS imposed a moratorium on new claims filed after September 14, 2023. This pause was later extended, effectively stalling the review of claims submitted after January 31, 2024.
IRS Commissioner Danny Werfel explained, “This pause gave us time to add more safeguards and better compliance filters to prevent improper payments.” He also stated, “While we know delays have been difficult for legitimate businesses, we also have a responsibility to protect taxpayers from fraud.”
In August 2024, the IRS identified approximately 50,000 valid claims from the backlog and began releasing payments. By December, Werfel announced a goal to process 500,000 more claims in 2025, though he admitted the full timeline was uncertain. “We’re working to speed this up, but it is a careful process,” he said.
IRS Enforcement Ramps Up
Alongside its processing efforts, the IRS launched a major compliance campaign targeting fraudulent ERC claims. In mid-2024, it mailed 28,000 denial letters, referred to as IRS Letters 105C or 106C, signaling the agency’s determination to reject improper claims early in the review process.
The IRS estimated this denial wave alone prevented $5 billion in potentially improper refunds. By early 2025, tens of thousands more denial letters had been sent. Businesses that receive such notices have only 30 days to respond before the denial becomes final. According to the IRS, “There are no extensions to this 30-day period,” underscoring the urgency for recipients to act promptly.
The IRS also launched over 460 criminal investigations into suspected ERC fraud by August 2024. These cases often involve businesses that never existed during the claimed period or promoters who instructed companies to file false claims. The IRS’s Criminal Investigation Division and the Department of Justice are actively pursuing these cases.
Commissioner Werfel said the ERC has become “one of the most complex tax provisions ever administered.” He emphasized that the agency is using all available resources to protect the integrity of the program.
What Makes a Claim Invalid?
According to updated IRS guidance, there are several common red flags that may trigger denial or audit.
One major issue is claiming the credit without a valid government order or a significant drop in gross receipts. The IRS clarified in a 2024 FAQ that “minor disruptions, like mask mandates or distancing protocols, do not qualify as a partial suspension of operations.”
Another common problem is claiming wages paid to family members, which is prohibited by law. For example, wages paid to a business owner’s spouse, children, or parents cannot be used to calculate the credit.
The IRS has also disqualified claims where businesses improperly included wages that had already been used for PPP loan forgiveness. As the IRS warned, “Payroll costs used for PPP loan forgiveness cannot be double-counted for the ERC.”
Other common errors include:
- Large employers claiming wages for employees who were actively working
- Claiming every eligible quarter without sufficient documentation
- Misusing supply chain issues as justification without proof of supplier shutdowns
Interest Payments, Withdrawals, and Disclosure Options
Due to processing delays, the IRS has paid over $8.1 billion in interest to businesses still waiting for their refunds. While helpful to those eventually paid, this figure shows the severe impact of the backlog.
For businesses that filed ineligible claims, the IRS created a special ERC Withdrawal Program. This allows businesses to pull back unprocessed claims without penalty. The request must be submitted before the refund check is issued or cashed.
The agency also reopened a Voluntary Disclosure Program (VDP) in August 2024. This one-time initiative allowed businesses to repay improper ERC funds and avoid penalties. In exchange, they were allowed to keep 15 percent of the amount claimed. Over 2,600 businesses disclosed more than $1.09 billion in erroneous credits through this process. The program ended on November 22, 2024.
For payroll providers who submitted multiple claims on behalf of clients, the IRS created a streamlined withdrawal process to help correct errors without delaying legitimate refunds.
Clarifying Tax Reporting Rules
The IRS addressed another problem in March 2025 related to how businesses should report ERC-related changes on their income tax returns.
If a refund is received after the business had already filed without amending, the IRS now allows the amount to be added as income on the return for the year the refund is received. This avoids the need to reopen past tax years.
If a refund is denied after the business had reduced its deductions in anticipation, the IRS allows them to claim that deduction on the current year’s return.
According to the updated guidance, “These adjustments remove the need for amended protective claims and simplify compliance for businesses impacted by the backlog.”
The April 15 Deadline Has Passed
The final deadline to file ERTC claims for 2021 was April 15, 2025. Businesses that did not submit their claims by this date have missed the opportunity to apply for the credit. For those who filed on time, it’s essential to ensure that all documentation is in order and to respond promptly to any IRS correspondence.
Leadership Changes at the IRS
In January 2025, IRS Commissioner Danny Werfel resigned from his position. Since then, the agency has experienced a series of leadership changes. As of April 18, 2025, Michael Faulkender, formerly a finance professor and deputy Treasury secretary, is serving as the acting IRS commissioner. He is the fifth person to hold the position in 2025.
President Donald Trump has nominated former Representative Billy Long to be the new IRS commissioner. Long’s nomination is pending Senate confirmation. During his time in Congress, Long sponsored bills to abolish the IRS and has been involved in controversies related to tax credits.
What to Expect Moving Forward
With the April 15 deadline passed and new leadership at the IRS, businesses should stay informed about any further developments related to the ERC. It’s crucial to maintain accurate records, respond to IRS inquiries promptly, and consult with tax professionals to ensure compliance.
The IRS continues to process valid claims and address fraudulent ones. As the agency undergoes leadership changes and implements
