ERC Audits, Disallowances & IRS Enforcement: What To Expect

The Employee Retention Credit filing window may be closed, but for businesses that claimed the credit, the IRS is just getting started. Audits are ramping up, disallowance letters are going out, and criminal investigations are underway.

Here’s what you need to know to protect your business.

The IRS Is Cracking Down On ERC Claims

ERC enforcement has become one of the IRS’s top priorities, and the numbers reflect that.

Since the CARES Act was passed in 2020, the IRS Criminal Investigation Division has launched more than 2,000 COVID fraud cases involving an estimated $10 billion in attempted fraud. Of those, over 500 investigations specifically target ERC claims, covering more than $5.6 billion in alleged fraud. So far, 75 cases have resulted in federal charges, with convicted defendants averaging 21 months in federal prison.

On the civil side, the IRS has sent tens of thousands of disallowance letters, issued recapture demands for credits already paid, and currently has over 40,000 claims under exam or appeal.

One thing worth noting: the IRS isn’t just going after businesses. Promoters — the third-party firms that encouraged businesses to file ERC claims — are squarely in the crosshairs, too.

What Triggers An ERC Audit?

Claiming the ERC does not automatically trigger an audit. But the IRS has been upfront that ERC claims are being scrutinized more heavily than typical tax filings, and certain red flags significantly increase your risk.

The IRS is specifically looking for:

• Discrepancies in your claim: Mismatched figures, incomplete information, or inconsistencies between your claimed credit amount and your payroll records, financial statements, or tax filings are common audit triggers.
• Unusually large claims: Claims that appear very large relative to your business size, industry, or prior tax history draw additional scrutiny.
• PPP double-dipping: Using the same wages to qualify for both ERC and Paycheck Protection Program loan forgiveness is one of the most frequently flagged errors the IRS looks for specifically.
• Working with an ERC mill: The IRS pays close attention to whether a contingency fee was paid to a third-party promoter. Businesses that found an ERC preparer through aggressive marketing and paid a percentage-based fee are considered higher risk.
• Filing late: The IRS has stated it is more skeptical of claims filed later in the program’s life. Q3 and Q4 2021 claims filed after January 31, 2024, have been disallowed entirely under the One Big Beautiful Bill.

If your claim involved any of the above, it’s worth consulting a tax professional proactively rather than waiting to hear from the IRS.

Use The IRS ERC Eligibility Checklist To Review Your Claim

If you’re concerned about whether your original ERC claim was valid — or if a promoter told you that you qualified and you’re now second-guessing it — the IRS has a free tool that can help.

The IRS ERC Eligibility Checklist walks you through a series of questions to help determine whether your business actually met the requirements for the credit. It’s available as an interactive tool or as a printable PDF guide directly from the IRS.

In the context of an audit, this checklist is a useful starting point for assessing your exposure before the IRS contacts you. If you work through it and find your claim appears shaky, that’s a signal to consult a tax professional proactively rather than waiting.

How Long Can The IRS Audit ERC Claims?

The IRS typically has three years from the date a return is filed to audit it and assess additional taxes or penalties. For most ERC claims, this standard timeline applies, but there are important exceptions.

For Q3 and Q4 2021 claims, the statute of limitations was already extended to five years — and has since been extended further under the One Big Beautiful Bill.

It’s also worth noting that there is no statute of limitations when it comes to fraudulent returns. If the IRS determines that a claim was filed with the intent to defraud, there is no time limit on investigation or prosecution.

What To Do If You Receive A Disallowance Letter

If the IRS denies your ERC claim, you will receive either:

• Letter 105-C for a full disallowance or
• Letter 106-C for a partial disallowance

These letters are formal notices that the IRS has reviewed your claim and determined it does not meet ERC eligibility requirements.

You typically have 30 days from the date of the letter to respond or appeal. If you believe your claim was valid, you have the right to appeal to the IRS Independent Office of Appeals, but you’ll need strong documentation and, ideally, a tax attorney to make your case effectively.

If you receive a disallowance letter and are unsure whether your claim was legitimate, consult a tax professional before responding. How you respond — and what documentation you submit — can significantly affect the outcome.

What Do I Do If My ERC Claim Is Audited By The IRS?

Receiving an IRS audit notice is stressful, but it doesn’t automatically mean you’ve done something wrong. An audit just means the IRS wants to verify the accuracy of your claim. Here’s how to approach it.

Your first call should be to a tax professional. If you filed your ERC with an accountant or a third-party service, reach out immediately, as many reputable providers include audit support as part of their service.

Stay on top of all IRS communications and respond by the requested deadlines. Ignoring notices won’t make them go away and can make things worse. If you’re working with a tax professional who has power of attorney, they may handle all communications with the IRS directly on your behalf.

Be prepared to submit documentation, including:

• Payroll records for every quarter you claimed the ERC
• Documentation proving your business was fully or partially shut down by a government mandate
• Records showing a decline in gross receipts during the claimed period
• PPP loan and forgiveness documentation
• Bank statements, employment tax records, and general accounting records

If the audit finds errors in your filing, the most likely penalty is a 20% accuracy-related penalty on the excessive amount claimed. If the IRS determines fraud was involved, that penalty can rise to 75%.

Can You Still Withdraw An ERC Claim?

If your ERC claim hasn’t been paid yet — or you received a refund check but haven’t cashed it — you may still be able to withdraw it. Withdrawn claims are treated as if they were never filed, with no penalties or interest assessed.

How you withdraw depends on your situation:

• Claim not under audit: Write “Withdrawn” in the left margin of your amended return, sign and date it, and fax it to 855-738-7609.
• Claim under audit: Send your withdrawal request directly to your assigned IRS examiner.
• Uncashed refund check: Write “Void” on the back and follow the instructions on the IRS website.

Keep copies of everything you send. Note that withdrawing a fraudulent claim does not protect you from criminal investigation or prosecution.

The IRS Voluntary Disclosure Program

The IRS offered two rounds of an ERC Voluntary Disclosure Program (VDP) to give businesses that received an improper ERC credit an opportunity to repay it at a discount and avoid penalties. Both programs are now closed, with the second round ending on November 22, 2024.

Under those programs, participating businesses were required to repay 85% of the ERC they received, with the remaining 15% forgiven. Penalties and interest were waived, and businesses did not have to amend income tax returns to reduce wage expenses.

While the VDP is no longer available, businesses that believe they received an improper ERC credit should not ignore the issue. The IRS continues to audit and pursue repayments, and coming forward with the help of a tax professional is better than waiting for the IRS to act first.

What Do I Do If I Receive An IDR From The IRS?

Receiving an Information Document Request (IDR) from the IRS can feel alarming, but don’t panic. An IDR is simply a formal request for additional documents that the IRS needs to verify your ERC claim. It does not automatically mean you are under full audit or that you’ve done anything wrong.

That said, an IDR should be taken seriously. Here’s what to do:

• Contact a tax professional immediately. Before responding to the IRS, get professional guidance. How you respond to an IDR can significantly affect whether the matter escalates to a full audit.
• Respond on time. IDRs come with a deadline. Missing it can trigger additional scrutiny or penalties.
• Gather your documentation. The IDR will specify exactly what the IRS is looking for, but commonly requested documents include payroll records, financial statements showing a decline in gross receipts, government shutdown orders, and PPP loan documentation.
• Keep copies of everything. Retain copies of all documents you submit to the IRS and track any correspondence by certified mail.

If the IRS receives satisfactory documentation from your IDR response, the matter may be resolved without escalating further. If not, it may proceed to a full audit, which is why getting professional help at the IDR stage is so important.

How The One Big Beautiful Bill Affects ERC Audits

The One Big Beautiful Bill, signed into law on July 4, 2025, made three significant changes that directly affect businesses with existing ERC claims.

The audit window for Q3 and Q4 2021 claims was extended from five years to six, with the clock starting from the date the claim was filed, not the original payroll tax return.

Any Q3 and Q4 2021 claims filed after January 31, 2024, and still pending as of July 4, 202,5 have been retroactively disallowed, even if otherwise valid. Claims paid before July 4, 202,5 are not affected, though claims paid after that date may still be subject to recapture.

And promoters who charged contingency fees now face a $1,000 penalty per violation plus a 20% penalty on erroneous refund claims.

For a full breakdown of how the OBBB affects ERC compliance, see our complete ERC guide.

The Bottom Line On ERC Audits

With tens of thousands of audits underway, criminal investigations in progress, and the audit window now extended to six years for some claims, businesses that claimed the ERC can’t afford to be complacent.

The good news is that businesses with legitimate claims and solid documentation have little to fear. The IRS is primarily focused on fraudulent claims and the promoters who encouraged them, not businesses that did their homework and filed accurately.

Regardless of where you stand, the smartest move right now is to get your documentation in order, understand your compliance obligations, and work with a qualified tax professional if you have any concerns. Don’t wait for the IRS to come to you.