The Employee Retention Credit was a legitimate and significant pandemic-era tax credit for businesses that retained employees during COVID-19 shutdowns and revenue declines. It was also one of the most aggressively marketed tax schemes in recent history - promoters filed hundreds of thousands of fraudulent or questionable claims on behalf of businesses that did not qualify. The IRS response has been equally aggressive: a moratorium on processing new claims, 20,000+ disallowance letters, expanded audits, and criminal referrals. Businesses with ERC claims - whether filed directly or through a promoter - need to evaluate their position now, before IRS contact.
Processing status: In August 2024 the IRS shifted its moratorium and began processing claims filed between September 14, 2023 and January 31, 2024. For the third and fourth quarters of 2021, OBBBA §70605(d) bars any credit or refund under §3134 unless the claim was filed on or before January 31, 2024. As of the week ending October 3, 2026, the IRS reported about 13,000 remaining ERC claims in various stages, including 3,000 under audit and 1,500 with the IRS Independent Office of Appeals.
Disallowance letters: The IRS has sent disallowance letters to tens of thousands of employers for claims it determined are not eligible. The IRS generally asks that a disallowance be disputed within 30 days to help protect the two-year period to request an appeal or file suit.
Voluntary Disclosure Program: The ERC VDP allowed businesses to repay improperly received ERC at 80 cents on the dollar (keeping 20%) in the first program. The first VDP closed on March 22, 2024. A second VDP, limited to 2021 claims and allowing participants to keep 15%, closed on November 22, 2024. No open VDP program exists as of 2026 - but businesses that have not yet received IRS contact may still want to proactively address questionable claims.
Promoter investigations: The IRS has issued summonses to multiple ERC promoters and is pursuing criminal charges against the most egregious cases.
The ERC was available to eligible employers for quarters in 2020 and 2021. An employer was eligible for a given quarter under one of two tests:
| Year | Threshold | Comparison Period |
|---|---|---|
| 2020 (wages paid March 13 - December 31, 2020) | Gross receipts less than 50% of the same quarter in 2019 (eligibility continues until the quarter after receipts exceed 80%) | Same quarter in 2019 |
| 2021 (Q1-Q3) | Gross receipts less than 80% of the same quarter in 2019 | Same quarter in 2019 (or, by election, the immediately preceding quarter compared to its 2019 quarter) |
The business was subject to a governmental order (federal, state, or local) that fully or partially suspended the operation of the trade or business. This is where most of the fraud occurred. Promoters told businesses that general pandemic-related orders (shelter-in-place orders, capacity restrictions, mask mandates) automatically qualified any business. That is incorrect.
The government order must have had more than a nominal effect on the business. A restaurant that was forced to close its dining room and could only do takeout was partially suspended. An office-based professional services firm whose employees continued working from home under a general stay-at-home order was generally not suspended - working from home is still working.
| Period | Credit % | Max Wages Per Employee | Max Credit Per Employee |
|---|---|---|---|
| 2020 (wages paid after March 12) | 50% | $10,000 for all of 2020 | $5,000 for all of 2020 |
| 2021 (Q1-Q3) | 70% | $10,000 per quarter | $7,000 per quarter ($21,000 total) |
| 2021 Q4 (Recovery Startup) | 70% | $10,000 per quarter | $7,000 (limited to $50,000 per quarter total) |
The normal 3-year statute of limitations for employment tax returns was extended for the credit under IRC §3134, which applies only to wages paid after June 30, 2021 (the third quarter of 2021, and the fourth quarter of 2021 for recovery startup businesses). For those quarters the IRS may assess until 6 years after the latest of the date the original return was filed, the date it is treated as filed under §6501(b)(2), or the date the claim for credit or refund was made (OBBBA §70605(e), applicable to assessments made after July 4, 2025; the prior period was 5 years). Earlier quarters (2020 and the first half of 2021) fall outside §3134, so the §3134(l) extension does not by its terms apply to them and their assessment periods must be analyzed separately. Businesses with questionable ERC claims are not safe simply because time has passed.
Businesses that received ERC based on promoter advice without solid legal support have several options depending on their situation: