IRS Publishes New Fact Sheet on the Pandemic-Era Employee Retention Credit (ERC)

The Internal Revenue Service (IRS) recently published a set of frequently asked questions (FAQs) addressing its ongoing efforts to combat fraud under the pandemic-era Employee Retention Credit (ERC) program. While the IRS’ FAQs focus primarily on a new limitation on the ERC established under the One Big Beautiful Bill (OBBB), they also make clear that the IRS is continuing to prioritize ERC-related enforcement. Learn more from Texas tax attorney Lawrence Brown:

IRS Continues to Target Businesses and Promoters for ERC Fraud

One fact the IRS’ new FAQs immediately make clear is that the bureau is continuing to target both businesses and promoters for ERC fraud. In its first FAQ answer, the IRS writes:

“The [OBBB] introduced new enforcement provisions affecting the ERC. One of these provisions . . . prevents the IRS from allowing or refunding ERCs after July 4, 2025, for the third and fourth quarters of 2021 if those claims were filed after January 31, 2024 . . . . Other parts of the bill strengthen compliance enforcement by imposing penalties on certain promoters of the ERC who fail to meet due diligence requirements when assisting with certain credit claims.”

Fraud under the ERC program has been a concern since the program’s launch in early 2020. While the IRS’ early enforcement efforts focused primarily on businesses improperly claiming the ERC to reduce their federal tax liability, the IRS has since expanded its enforcement efforts to target “promoters” as well. These “promoters” include tax advisors, accountants and others who are accused of helping businesses claim fraudulent credits (and refunds) under the ERC program both during and after the pandemic.

Under the Internal Revenue Code, businesses that improperly claim tax credits can face civil or criminal penalties depending on the specific nature of the allegations at issue (i.e., whether the business is accused of inadvertently or intentionally defrauding the federal government). Parties that encourage or facilitate tax evasion and tax fraud can face civil or criminal penalties as well. We have recently seen IRS Criminal Investigation (IRS CI) and the U.S. Department of Justice (DOJ) pursue criminal charges against businesses, business owners and promoters in several cases, and they have both made clear that they will not hesitate to pursue criminal charges when warranted.

While the ERC was only available for the 2020 and 2021 tax years, various federal statutes extended the filing deadlines—ultimately allowing businesses to claim the ERC retroactively into 2025. However, the OBBB retroactively disallowed claims filed after January 31, 2024. The IRS and DOJ have identified fraud under the ERC and other pandemic-era programs (including the Paycheck Protection Program (PPP)) as a top federal law enforcement priority, and the OBBB provides them with new enforcement tools going forward.

Late-Filed ERC Claims “Generally” Are Not Subject to Reversal or Repayment

The IRS’ new FAQs specifically address the scenario where a business filed an ERC claim after January 31, 2024 and received a credit or refund before the OBBB’s allowance cutoff date of January 4, 2025. Regarding the potential for reversal or an obligation to repay a refund received during this period, the IRS writes:

“Generally, . . . [i]f your claim was filed after January 31, 2024, but was refunded or credited before July 4, 2025, [the OBBB] does not apply to your claim. However, other IRS compliance activities may still result in an adjustment or bill.”

While this leaves the IRS with a lot of wiggle room to pursue enforcement as it deems warranted, the intent of this FAQ answer appears to be to leave the door open for the IRS to pursue enforcement when claims allowed or refunded during this period are noncompliant for other reasons. For example, if a business filed an ERC claim based on falsified payroll data or claimed the ERC for non-qualifying wages, the fact that the business received a credit or refund will not insulate the business from facing an audit or investigation for ERC fraud.

Reliance on IRS Guidance is Not Necessarily a Defense to Noncompliance

The IRS’ new FAQs also make multiple references to the bureau’s policy on reliance. The legislation that established, expanded and extended the ERC program left several important questions unanswered; and, to help taxpayers, the IRS published a series of FAQs explaining the program’s eligibility criteria. However, as the IRS’s guidance on reliance makes clear:

“FAQs typically provide responses to general inquiries… and may not reflect various special rules or exceptions that could apply in any particular case. FAQs that have not been published in the Bulletin will not be relied on, used, or cited as precedents by Service personnel in the disposition of cases. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer’s case, the law will control the taxpayer’s tax liability.”

While the IRS’ guidance notes that reliance on FAQs is “relevant” for determining what penalties apply, this also implicitly makes clear that the IRS will still pursue penalties in cases in which businesses relied on the IRS’s FAQs when deciding whether (and to what extent) to claim the ERC. As a result, and in light of the IRS’ ongoing focus on ERC fraud enforcement, businesses that made good-faith attempts to ensure compliance may still need to revisit their filings in order to assess their ERC-related risk going forward.

What Should You Do if You Have Concerns About ERC Fraud?

With all of this in mind, what should business owners (and “promoters”) do if they have concerns about ERC fraud? Given the ongoing risk of facing civil or criminal enforcement action, informed decision-making is essential. While taxpayers have options for proactively resolving high-stakes tax controversies with the IRS, doing so requires a targeted and highly strategic approach. Contact us if you need to know more.  

Request a Confidential Consultation with Texas Tax Attorney Lawrence Brown

Texas tax attorney Lawrence Brown represents businesses and high-net-worth individuals in high-stakes federal tax controversies. If you have questions about ERC compliance or concerns about facing an ERC-related audit or investigation, please call 888-870-0025 or contact us online to request a confidential consultation.