November 11, 2025

In recent months, the Internal Revenue Service (IRS) has significantly increased enforcement actions related to the Employee Retention Credit (ERC) — a pandemic-era tax incentive designed to help employers keep workers on payroll. While the ERC offered substantial relief during the COVID-19 crisis, widespread abuse and improper claims have triggered a wave of audits, voluntary disclosure programs, and potential criminal investigations.

Background on the Employee Retention Credit

The ERC, enacted under the CARES Act of 2020, allowed eligible employers to claim a refundable credit for qualified wages paid to employees during certain periods affected by the pandemic. Congress later expanded eligibility through the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of 2021.

In many cases, businesses could claim up to $26,000 per employee — a significant financial benefit. However, evolving guidance, aggressive marketing, and third-party “ERC mills” led many employers to file claims they may not have been entitled to.

IRS Enforcement Efforts in 2024–2025

The IRS has labeled ERC fraud a top enforcement priority, announcing several initiatives:

• Moratorium on new ERC claims through at least April 2025, to address the backlog of questionable filings.
• Audit expansion, with thousands of letters sent to employers requiring substantiation of claims.
• Criminal investigations into promoters who charged contingency-based fees or submitted fraudulent claims.
• A voluntary disclosure program allowing businesses to return improperly claimed credits while avoiding criminal penalties and interest.

Businesses that claimed the ERC—especially those advised by third-party firms—should expect heightened scrutiny.

Key Legal Issues for Businesses

When evaluating or responding to Employee Retention Credit (ERC) issues, businesses should pay close attention to several important areas:

1. Eligibility Documentation: Maintain detailed records showing how your operations were impacted by COVID-19 or related government orders. The IRS will require clear evidence to support any ERC claim.
2. Substantiation of Wages: Ensure that only qualified wages are included in your calculations. Wages covered by other relief programs—such as Paycheck Protection Program (PPP) loan forgiveness—cannot also be used for ERC purposes.
3. Promoter Involvement: Be cautious if your business relied on third-party ERC promoters or consultants. The IRS is scrutinizing promoters who submitted or encouraged improper claims, and businesses may be asked to substantiate their filings independently.
4. Amended Returns and Disclosure: If you discover that an ERC claim may have been filed in error, it is important to take prompt action. Filing an amended return or participating in an IRS disclosure program can help minimize penalties and potential enforcement risk.

Practical Guidance

• Review all ERC claims made between 2020 and 2022 for accuracy and supporting documentation.
• Consult with a tax attorney before responding to IRS correspondence or audit notices.
• Consider voluntary disclosure if errors are identified—early action can significantly reduce penalties.
• Avoid third-party promoters offering new or amended claims without a thorough legal and accounting review.

Conclusion

The ERC was a lifeline for many businesses during the pandemic, but it has become a focal point of federal tax enforcement. Employers and advisors must approach ERC issues with caution, documentation, and competent legal counsel. Proactive compliance and transparency with the IRS are the best defenses against costly audits and potential penalties.