IRS issues FAQs addressing ERC compliance

The employee retention credit (ERC) continues to be one of the most closely monitored pandemic-era tax provisions. The IRS recently released a new set of frequently asked questions (FAQs) clarifying how the credit is handled under the compliance provisions of the One Big Beautiful Bill Act (OBBBA). These updates give tax professionals, payroll processors and small business advisers essential insight into how the agency plans to manage ERC reviews and enforcement going forward.

Key takeaways from the FAQs

The IRS FAQs confirm that ERC refund claims for wages paid in the third and fourth quarters of 2021 (if filed after Jan. 31, 2024) will be disallowed. This cutoff marks a clear compliance deadline and closes the window for late claims from those quarters. The FAQs also define when a claim is considered filed and outline how taxpayers should respond if a credit is denied. In addition, the IRS clarified that for affected claims, the statute of limitations has been extended to six years, giving the agency more time to review, audit or adjust claims. This longer window signals heightened enforcement and a stronger emphasis on substantiation. Taxpayers are also reminded of their appeal rights and the steps they can take when a claim is under review.

Why the update matters for practitioners

For many professionals, this new guidance changes the landscape for advising clients who claimed ERC refunds during 2020 and 2021. Many of those claims were filed quickly during the pandemic relief rush, and not all were backed by proper documentation or clear eligibility support. With the IRS now confirming stricter compliance timelines, you may need to revisit existing client files. Clients who filed Q3 or Q4 2021 claims after Jan. 31, 2024, are no longer eligible for those refunds. Even those with timely claims should prepare for additional review under the extended statute of limitations.

Documentation is more important than ever

The IRS emphasized that employers and advisers must be able to substantiate all ERC claims with documentation. This includes payroll records, proof of government orders that suspended operations, gross receipts comparison reports and detailed wage allocation records. As the IRS shifts from processing to enforcement, record retention becomes critical. Practitioners should encourage clients to maintain complete ERC files, including correspondence and calculation workpapers, for at least six years (§3134(l)(1)). Proper organization now will make future audits more manageable.

How to communicate with clients about the changes

Advisers should begin proactive outreach to affected clients. Start by identifying clients who filed ERC claims, particularly for the last two quarters of 2021, and verify the filing dates. Discuss the disallowance for late-filed claims and outline what steps to take if a claim is denied. For those whose claims remain valid, explain that the IRS now has additional time to review the claim and may request documentation at any point during the extended audit window. Having these conversations early builds client trust and prevents confusion when letters or inquiries arrive.

Understanding the appeals and adjustment process

The FAQs also explain how taxpayers can respond when the IRS disallows an ERC claim. Businesses will have the opportunity to provide documentation or request reconsideration. Taxpayers retain full appeal rights, but timely action is essential once a notice is received. Encourage clients to share any correspondence with your office immediately. Responding quickly ensures that deadlines are met and the taxpayer’s position is preserved.

Watch for wage deduction adjustments

ERC disallowances will impact income tax reporting. When a business claims the ERC, it must reduce its wage deduction by the credit amount. If a claim is denied, those wages may again be deductible, which may require amending prior income tax returns. Reviewing these potential adjustments now helps clients stay compliant and avoid unexpected tax differences later .

Penalties and enforcement under OBBBA

Under the OBBBA, the IRS has enhanced enforcement authority to address false or improperly supported ERC claims. The agency is also targeting promoters who filed claims without verifying eligibility or who misrepresented the credit’s availability. Tax professionals should advise clients against responding to solicitations from ERC mills or third-party promoters who continue to advertise aggressive refund schemes.