ERC denials and 2025 reporting questions for tax pros

The employee retention credit (ERC) may feel like a closed chapter, but the claim period closing has not ended IRS enforcement or taxpayer obligations. Recent questions from NATP’s member community reflect a common theme of uncertainty about how to respond when the IRS takes action.

As we head into 2026, understanding how ERC denials, appeals and return reporting issues fit together is essential for managing risk and setting realistic client expectations.

The IRS has entered a broad ERC disallowance phase

This shift is catching many taxpayers and practitioners off guard, especially when claims were filed in good faith before enforcement tightened.

Many of the denials being issued relate to claims submitted after Jan. 31, 2024, following statutory changes that narrowed the filing window for certain 2021 quarters. Even when employers believed they were filing within an earlier cutoff, the IRS is applying the revised law strictly. As a result, more taxpayers are receiving formal claim denial notices (such as ERC disallowance Letters 105-C and 106-C) rather than requests for additional information, and many post-Jan. 31, 2024, filings are being denied based on the statutory bar rather than a factual eligibility review. 

For tax pros, this means ERC issues are moving from a waiting game into an active response phase.

Appealing an ERC denial requires timely action

As ERC disallowance notices are issued, appeals are increasingly common next steps. When a denial notice is received, tax professionals should assume the appeal process is time sensitive and begin preparing immediately.

Taxpayers generally have a two-year statute of limitations to file suit after a formal claim disallowance notice. While that provides a defined window, it is not a reason to delay action. Begin preparing the protest and appeal immediately to protect deadlines. Remember that requesting review by the IRS Independent Office of Appeals does not extend the two-year period.

The burden of proof remains with the taxpayer, and incomplete or poorly supported filings can weaken a case. Timely, well-documented appeals are critical as the IRS moves forward with broad ERC enforcement.

An example of responding to an ERC disallowance notice

A small business receives an ERC disallowance notice in mid-2025 for a claim filed after Jan. 31, 2024, for the third quarter of 2021. The owner contacts their tax pro right away. The practitioner reviews the notice promptly, confirms the two-year deadline to file suit after a formal disallowance notice and begins assembling documentation to support the original claim, including documentation addressing the stated reason for denial. By acting quickly and filing a timely, well-supported protest and appeal request, the taxpayer preserves their rights and avoids missing critical deadlines during the IRS’s active enforcement phase. 

Using TAS and Form 907 strategically

The Taxpayer Advocate Service (TAS) can be a helpful resource in ERC cases when IRS communication stalls, delays become unreasonable or the taxpayer is experiencing economic hardship. While TAS cannot override IRS determinations or reopen eligibility, it can elevate cases, clarify procedural issues and request expedited handling in appropriate situations. 

In some disputes, Form 907, Agreement to Extend the Time to Bring Suit, may also come into play. Executing Form 907 extends the two-year period to file suit, but it must be done before the statute expires and generally requires IRS countersignature. 

Because both tools affect timing and strategy, neither should be used routinely, and both require deliberate evaluation before proceeding.

Reporting ERC funds when they are received

Many taxpayers are receiving ERC payments years after the credit year, often without having reduced wage expenses on the original income tax return. In that situation, the IRS has clarified that an amended return is not always required. 

Interest paid by the IRS on ERC refunds is taxable interest income in the year received. Fees paid to attorneys or ERC promoters are not netted against the credit and must be deducted based on their character and timing.

Special considerations may apply if wages were capitalized or did not reduce tax liability. In those cases, other adjustments, such as basis reductions, may be required. 

Helping clients navigate what comes next

Tax professionals play a key role in responding promptly, interpreting notices accurately and preventing reactive decisions that could increase risk.

Document positions thoroughly. Read every notice carefully. Be cautious with appeals timing. Track the two-year deadline that begins with a formal claim disallowance notice, since administrative appeals do not extend it. Prepare clients for long timelines and uncertain outcomes. 

ERC may no longer be front-page news, but it remains an active and evolving issue for many practices.

NATP continues to monitor IRS developments, professional guidance and real-world practitioner experiences related to ERC enforcement and reporting. Our education and resources are designed to help members navigate complex issues like these with clarity and confidence, now and into the years ahead.