IRS Releases New Employee Retention Tax Credit Guidance

Mar 28, 2025

Wait, we’re talking about the Employee Retention Tax Credit (ERC) yet again? Yes, you read it right, after hearing very little on the topic for the past 18 months, ERC is back in the news. On March 20, 2025, the IRS released new Employee Retention Tax Credit Guidance in an updated FAQ.

Specifically, the IRS introduced a new section entitled “Income Tax & ERC,” that addresses, one, situations where taxpayers didn’t reduce their claimed wage expense but received the ERC, and two, situations where taxpayers did reduce wage expenses but had a disallowed ERC claim. The tax authority also expanded guidance on reporting ERC fraud.

Here is what you need to know:

Income Tax & ERC

  • The IRS stands by its original position that taxpayers should have reduced their deductible wage expense by the amount of allowed ERC in the tax year the qualified wages were paid or incurred. However, the IRS is now providing alternative solutions for claiming unreduced wages. Under the revised guidelines, taxpayers now have the option to report the overstated wage expense as gross income in the tax year when the Employee Retention Credit was received, rather than amending their previous returns. This marks a shift from the earlier policy.
  • The updated FAQ also addresses scenarios where an ERC claim was denied after a taxpayer had already reduced their wage expenses for the year in which the qualified wages were paid. In these cases, taxpayers can now adjust their current return to reflect the increased wage expense corresponding to the disallowed ERC, instead of filing an amended tax return, an AAR, or a protective claim for refund for the earlier tax year. It’s important to note that taxpayers may still opt to amend previous returns to recapture the previously reduced wages.

ERC Scams

  • The IRS has issued further guidance on the procedures for reporting ERC-related fraud, strongly urging taxpayers to report any suspicious activities, including illegal, tax-related activities involving ERC claims, individuals who promote improper and abusive tax schemes, and tax return preparers who deliberately prepare improper returns. The step-by-step process for reporting ERC fraud can be found in the “ERC Scam” section of the FAQ.

To read the full FAQ along with the updated guidance, please refer to the IRS website here. To better understand how this new guidance may impact your business, we encourage you to connect with our Employee Retention Tax Credit (ERC) lead, Mike Hanf.

Mike Hanf, Tax Partner – mike.hanf@wvco.com

Categories: Tax Compliance

Freeze on Employee Retention Credit (ERC) Processing

Sep 18, 2023

What happened:
As of last Thursday, the IRS temporarily halted the processing of new Employee Retention Credit (ERC) claims, owing to a surge in ERC-related scams and fraudulent submissions. IRS Commissioner Danny Werfel expressed concern over genuine small businesses falling prey to deceptive schemes. “As we move further from the pandemic, it becomes evident how the noble intentions behind this program have been exploited,” stated Werfel.

Initially, the ERC was designed to offer relief to businesses and tax-exempt entities. Yet, the allure of a refundable tax credit has led to a rise in opportunistic consulting firms. Many of these firms, while promising substantial refunds, neglect to inform businesses about crucial wage deduction adjustments an other limitations contained within the ERC rules.

Key details:

  • The processing freeze will be in effect until at least Dec. 31, 2023, meaning no new ERC claims will be entertained.
  • The IRS will still review the 600,000 previously filed ERC submissions.
  • While payments on prior claims will persist, claimants might need to furnish extra documentation to confirm their claim’s authenticity.
  • The standard processing timeframe for ERC claims may exceed 180 days, especially if further scrutiny or an audit is required. The IRS notes that several claims are already earmarked for audits.
  • Due to the heightened examination of filings, expect processing delays and intensified ERC audit inquiries and criminal probes. The agency’s main focus is on potential fraudulent promoters and enterprises.
  • The IRS emphasizes that illegitimate ERC claimants will be liable to repay the credit, potentially with added penalties. Claiming incorrectly might leave businesses in a financially precarious position.

Next Steps:
Given the intricate nature of the credit calculation, it’s imperative to partner with a trustworthy firm. Businesses should remain wary of overtly enticing tax-saving pitches. William Vaughan Company, a trusted industry leader, is poised to offer guidance and insights to anyone with concerns about their ERC filing.

Finally, the IRS has provided resources, including updated FAQs, to ensure businesses aren’t swindled by scam promoters or pressured into fraudulent applications. A forthcoming settlement program will also be launched by the agency this fall to oversee the repayment of certain unjust ERC claims. For comprehensive details, refer to the IRS’s official ERC website.

Categories: Tax Compliance