The Employee Retention Credit began under the CARES Act and was broadened by later pandemic legislation, including the American Rescue Plan Act. For a stretch of 2021 and 2022 it was aggressively marketed — often by firms that appeared specifically to sell it, charged a percentage of the refund, and disappeared once the cheque cleared.
Many of those claims were perfectly legitimate. A great many were not. The IRS has been working through the backlog ever since, and business owners who have not thought about the credit in years are still receiving correspondence about it.
The IRS paused processing of new claims after concluding that a substantial share were improper, and it has been examining previously paid claims since. The practical consequence for a business owner is that receiving the money was never the end of the process. A paid claim can still be examined, disallowed and recaptured.
The assessment window is also longer than most people assume. For wages in the later 2021 quarters, Congress extended the period in which the IRS can assess to five years rather than the usual three. A credit claimed in 2021 or 2022 can therefore still be in play well after an owner has mentally closed the book on it.
The adjustment most claimants never made
This is the issue we see missed most often, and it has nothing to do with whether the claim was valid.
If you claimed the ERC, you are required to reduce your wage expense deduction by the amount of the credit, for the year the wages were paid. Not the year the refund arrived — the year of the wages. For most claimants that means the 2020 or 2021 income tax return had to be amended.
Very often it never was. The payroll returns were amended to claim the credit, the refund came in, and the income tax return was left alone. The result is a business that deducted wages it was reimbursed for, which overstates the deduction and understates income for that year.
That is a genuine exposure, and it is one that exists even when the ERC claim itself was completely proper. It is also the kind of thing that surfaces at the worst possible time — during a sale, a financing, or an examination of something else entirely.
Warning signs a claim may not hold up
Not every claim is a problem. But some patterns are worth an honest second look:
- The claim was prepared by a firm that contacted you, specialised only in ERC, and charged a percentage of the refund
- Eligibility rested on a “partial suspension of operations” that was never documented with a specific government order
- Your revenue never actually declined in the quarters claimed
- Nobody gave you a workpaper showing which wages were used, quarter by quarter
- The same wages may also have supported a PPP loan forgiveness application
- You cannot currently produce the calculation at all
The last point matters more than it sounds. In an examination, the burden is on the taxpayer. A credit you cannot substantiate is functionally a credit you cannot keep, regardless of whether you were entitled to it.
If a notice arrives
IRS correspondence about the ERC generally falls into a few categories: a request for documentation supporting the claim, a proposed or full disallowance, or a notice seeking to recover a credit already paid.
Two things matter more than anything else at that point. Deadlines are short — the window to respond or to preserve appeal rights is measured in weeks, and it does not reopen because the letter sat unopened. And the first response sets the tone for everything that follows.
A notice is not an accusation, and it is not a verdict. It is a request for evidence. If the evidence exists, this is a documentation exercise. If it does not, there are still orderly ways to resolve it — but improvising rarely produces one.
If your business claimed the ERC, three questions are worth answering now rather than when a letter arrives:
- Can you produce the calculation? The quarters claimed, the wages used, and the basis for eligibility — revenue decline or a specific government order.
- Was the wage deduction adjusted? Check whether the income tax return for the wage year was amended. If not, that needs addressing on its own merits.
- Do the ERC wages overlap with PPP forgiveness? The same wages cannot support both.
If the answer to the first is no, gather what you can while the people and records still exist. Promoters that have closed are not going to return your calls, and reconstructing a claim from payroll registers is slower than assembling it was.
We handle IRS notices and examinations for Wisconsin businesses, including ERC documentation and the amended-return cleanup that often goes with it. If you have a letter, or a claim you are quietly unsure about, book a 30-minute call. Bringing it up before the IRS does is always the cheaper version.
Every situation is a little different. A short conversation will tell you whether any of this actually affects you — and exactly what to do about it if it does.
