Think Your ERC Refund Is Safe? Think Again

During the height of the pandemic, the Employee Retention Credit (ERC) was a beacon of relief for business owners struggling to keep staff employed through uncertain times. But in 2025, the narrative has shifted. Instead of helping hands, the IRS now wields audit letters and enforcement teams, focusing on the explosion of improper ERC claims filed in recent years.

If your business claimed or is considering the ERC, you may be in the IRS’s sights. The agency has launched a full-scale crackdown on questionable claims, and many businesses are discovering that what they thought was a lifeline may now be a liability.

Here’s what every employer needs to know about the ERC, the IRS’s 2025 enforcement campaign, and what steps to take before trouble arrives.

Pandemic Relief or Post-Pandemic Risk?

The Employee Retention Credit was introduced under the CARES Act in 2020 as a refundable payroll tax credit. It was designed to encourage businesses to keep employees on payroll during government shutdowns or periods of significant revenue loss. At its peak, companies could claim up to $26,000 per employee for qualified wages paid during eligible quarters in 2020 and 2021.

Eligibility depended on one of two criteria: a full or partial suspension of business operations due to a government mandate, or a significant drop in gross receipts compared to 2019. The amount of the credit varied between tax years and employer size, and employers could file retroactive claims by submitting amended payroll tax returns using Form 941-X.

While the program was a lifeline for many, it also opened the door to abuse, especially as third-party “ERC mills” began aggressively marketing the credit and pushing filings en masse. That surge in questionable claims has now triggered a massive enforcement wave from the IRS.

The IRS Hits Pause, Then Hits Hard

What started as a temporary pause in processing ERC claims has now become a full-blown enforcement campaign. In response to a surge of potentially fraudulent filings, the IRS stopped accepting new claims in September 2023 and redirected its focus toward compliance and audits.

By 2024, the scale of enforcement had intensified, and by 2025, the agency had shifted into high gear:

• New claims halted: A moratorium on processing ERC submissions began in late 2023 and continued into 2024 and beyond.
• Tens of thousands of claims flagged: The IRS launched wide-scale reviews of previously filed claims, delaying or disqualifying many.
• Audits on the rise: Thousands of businesses have already been audited, with more under active investigation.
• Criminal cases growing: Over 450 criminal investigations are underway, covering nearly $7 billion in alleged ERC fraud.
• Promoters under scrutiny: The IRS isn’t just going after businesses; it’s also targeting third-party firms and consultants who pushed ineligible claims.

What Can Trigger an ERC Audit?

The IRS has published specific warning signs that it uses to flag high-risk ERC claims. Understanding these red flags can help you determine whether your claim may be subject to additional scrutiny.

For example, the agency is skeptical of businesses claiming credit for every available quarter or basing eligibility solely on vague “supply chain issues”. The IRS has clarified that general industry slowdowns or voluntary safety measures don’t count; you must show that a specific government order directly caused a suspension of operations.

Claims involving no drop in revenue, no documented government mandates, or duplicated wages used for PPP loan forgiveness are also under the microscope. And if you worked with a third-party ERC consultant who promised you “free money” or took a contingency fee based on your refund size, that’s another red flag.

The bottom line: if your ERC claim was rushed, undocumented, or encouraged by a marketer rather than a qualified tax professional, it may not survive an IRS review.

You Got the Money, Now What?

If your business has already received ERC funds, it’s time to double-check the foundation of your claim. Even if you were confident when you applied, the IRS expects all businesses to retain proof of eligibility and wage calculations for each quarter claimed.

Start by gathering the right records: payroll reports, gross receipts data for 2019 through 2021, copies of government shutdown orders that affected your operations, and documentation of how your operations were limited. Review whether your employee counts and wage calculations align with IRS definitions for your business size in each tax year.

If you find any discrepancies or are unsure whether you truly qualify, this is the moment to act.

Correcting a Bad Claim Is Better Than Waiting for an Audit

The IRS has signaled that businesses that voluntarily correct ERC mistakes will fare better than those waiting for an audit. If you suspect your claim was made in error, even unintentionally, you still have time to take action and potentially reduce penalties.

Here’s what that might look like:

• Amend past filings: If you’ve already received ERC funds and realize you weren’t eligible, you can file amended payroll tax returns to return the credit.
• Repay proactively: Voluntary repayment shows good faith and may help reduce penalties, interest, or enforcement actions.
• Disclosure programs show IRS flexibility: In early 2024, the IRS offered a Voluntary Disclosure Program allowing businesses to repay just 80% of improper credits with no penalties or interest. That program has ended, reflecting the agency’s willingness to work with businesses that step forward.
• Withdraw pending claims: If your ERC claim hasn’t yet been processed or paid, you may be able to withdraw it entirely to avoid future issues.
• Early action = fewer headaches: Addressing the issue before the IRS contacts you can save time, money, and stress, especially if penalties or audits are on the horizon.

Don’t Go It Alone

If you’re unsure whether your business is truly qualified for the Employee Retention Credit or you’ve already received a letter from the IRS, it’s smart to speak with a tax attorney before taking action. While general tax preparers can help with forms, a qualified tax attorney understands the legal side of things, including ERC audits, compliance, and negotiation strategies.

The ERC was created to support businesses during tough times, not to open the door to risky filings or bad advice from aggressive promoters. If you received funds, make sure your claim can withstand IRS scrutiny. And if you’re unsure, now is the time to address it before the IRS comes knocking.

ERC enforcement is ramping up through 2025 and beyond. Don’t wait for a problem to find you. Whether you need to correct a mistake, gather proper documentation, or defend a legitimate claim, we’re here to guide you through it confidently.

Contact Todd Unger for a confidential review and trusted guidance on your next steps.