The Employee Retention Credit is back in active processing at the IRS, but the rules and deadlines around it have shifted significantly. After months of uncertainty for businesses waiting on their claims, the IRS announced on August 8, 2024 that it would resume reviewing Employee Retention Credit submissions. That decision marked the end of a moratorium that had halted processing of claims filed after September 14, 2023. It gave businesses a clearer path toward resolution, whether that means receiving the credit or responding to a disallowance.
This Employee Retention Credit update matters for any business that submitted a claim during the moratorium window or is still waiting on a determination. Below, we break down what the IRS announced, which claims moved first, what red flags could put a claim at risk, how recent legislation changed the deadlines, and what businesses should do now. The question most employers are asking is straightforward: what happens to my ERC claim now that processing has restarted?
Why the IRS Paused Employee Retention Credit Processing
The IRS placed a moratorium on processing Employee Retention Credit claims filed after September 14, 2023, to address a surge of potentially fraudulent or inaccurate filings. During the pause, the agency digitized information on a large study group of ERC claims and analyzed patterns of errors and abuse. The goal was to improve processing accuracy before releasing another wave of payments.
The moratorium affected hundreds of thousands of businesses, including many that had filed legitimate claims and were waiting for approval. While the pause frustrated compliant taxpayers, the IRS stated that the analysis was necessary to protect the integrity of the ERC program and reduce improper payments.
The study results helped the IRS build risk profiles for claims, and those profiles now drive how the agency prioritizes its processing queue. Claims identified as clearly high-risk or clearly low-risk were addressed first, while moderate-risk claims have taken longer to resolve. That risk-based approach remains the single most important factor in predicting how quickly any given claim moves.
Which ERC Claims Are Being Processed First
The IRS is not processing claims strictly in the order they were received. Instead, the agency prioritized claims at the extremes of its risk spectrum. Claims showing the highest risk of being incorrect were reviewed and, in many cases, disallowed. At the same time, claims that appeared clearly legitimate moved toward approval and payment.
In its August 2024 announcement, the IRS focused on the roughly 1.4 million claims filed during the moratorium period, giving early attention to those submitted between September 14, 2023, and January 31, 2024. Businesses that filed in that window should monitor their correspondence closely. The IRS reported sending approximately 28,000 disallowance letters to businesses whose claims showed clear signs of error, and the agency estimated that more than 90 percent of those letters were validly issued.
For businesses that receive approval, the IRS confirmed they can expect the full Employee Retention Credit amount, generally with interest. The agency also noted that a business may receive payment for some valid tax periods while other periods remain under review. Partial approvals are possible, and additional processing time should be expected for complex claims. According to the National Taxpayer Advocate, a substantial inventory of claims remained open well into 2025, so patience is still warranted.
Employers in payroll-heavy sectors such as hospitality, construction, and skilled nursing and long-term care filed a disproportionate share of ERC claims. Businesses in these industries should pay particular attention to the timing and substance of any IRS correspondence.
The ERC Filing Window Has Closed
One of the most important developments since the moratorium lifted is that the window to file new ERC claims is now closed. For 2020 tax periods, the deadline to file or amend a return claiming the credit passed on April 15, 2024. For 2021 tax periods, the corresponding deadline passed on April 15, 2025. After those dates, most employers can no longer file a fresh ERC claim.
Federal legislation tightened the rules further. Under the ERC compliance provisions of the One, Big, Beautiful Bill, the IRS is barred from allowing or refunding ERCs for the third and fourth quarters of 2021 if the claim was filed after January 31, 2024. The IRS addressed these changes in its FAQs on the ERC compliance provisions, which note that this disallowance applies to those late-filed Q3 and Q4 2021 claims as of July 4, 2025, even if the employer otherwise met eligibility requirements.
The same legislation strengthened enforcement by authorizing penalties on certain ERC promoters who fail to meet due diligence requirements and by extending the period during which the IRS can assess tax on certain 2021 ERC claims. Because these rules turn on specific filing dates, businesses with pending claims should confirm exactly when each claim was filed and which quarters it covered before assuming a refund is forthcoming.
Red Flags That Could Trigger an ERC Disallowance or Audit
The IRS has identified several warning signs that a business may not qualify for the Employee Retention Credit. Understanding these risk factors is critical for any business with a pending claim or a claim that has already been paid.
The most common red flags include:
- Essential business status: Businesses classified as essential during the pandemic that could fully operate without restrictions generally do not qualify. The ERC was designed for businesses whose operations were fully or partially suspended by a government order.
- No decline in gross receipts: If a business cannot demonstrate a meaningful decline in gross receipts during the qualifying periods, the claim is likely to be flagged.
- Inability to document a government order: Businesses must show how a specific government order fully or partially suspended their operations. Vague references to the pandemic without a specific order are insufficient.
- Family member wages: Claiming wages paid to family members as qualified wages is a common error. The IRS scrutinizes these claims because related-party wages are subject to additional restrictions.
- Double-dipping with PPP: Wages already used to justify Paycheck Protection Program loan forgiveness cannot also be claimed for the ERC. This is one of the most frequently identified errors.
- Large employer wage claims: Large employers (those with more than 500 full-time employees in 2019 for 2021 periods, or more than 100 in 2019 for 2020 periods) can generally claim wages only for employees who were not providing services. Claiming wages for employees who kept working can be a disqualifying factor.
Businesses should review their claims against this list before the IRS reaches their file. A review with experienced tax advisory professionals can help confirm whether any of these factors apply to a specific filing, and ongoing client accounting services can keep the supporting payroll and receipts records organized for any future review.
How to Correct an Improper ERC Claim
For businesses that concluded they claimed the credit in error, the IRS offered two limited paths to come into compliance. The first ERC Voluntary Disclosure Program ran through March 22, 2024, and let participants repay 80 percent of the credit they received, keeping a 20 percent discount. A second Voluntary Disclosure Program ran through November 22, 2024, applied only to 2021 tax periods, and allowed participants to repay 85 percent of the credit, a 15 percent discount.
Both Voluntary Disclosure Programs have now closed, and the IRS has not announced a third round. The agency also offered a claim withdrawal process for filers whose claims had not yet been paid, which allowed an unprocessed claim to be treated as if it were never filed and to avoid penalties and interest.
Businesses that missed these windows still have options, but they are narrower and carry more exposure. A business that believes its claim was improper should speak with a qualified tax professional about amending its returns and repaying the credit before the IRS opens an examination, because voluntary correction generally produces a better outcome than an audit.
What Happens if Your ERC Claim Is Disallowed
Receiving a disallowance does not mean the process is over. The IRS issues a Letter 105-C to fully disallow an ERC claim, and businesses that disagree have the right to respond. Options include providing additional documentation, requesting an administrative appeal, and, if the appeal is unsuccessful, filing suit in federal court.
The IRS acknowledged that some early disallowance mailings inadvertently omitted a paragraph explaining the appeal process. The agency said it would ensure that language appears in future correspondence. If a business received a disallowance letter without appeal instructions, it should still preserve its appeal rights within the applicable timeframe.
Deadlines here are unforgiving. A refund suit on a disallowed claim is generally subject to a two-year statute of limitations under Internal Revenue Code Section 6532, measured from the date the IRS issues the notice of disallowance. Any business that believes its claim was wrongly denied should consult a tax advisor promptly, because the stakes are significant: an unfavorable outcome can leave the business owing back the credit plus penalties and interest.
The IRS Is Intensifying ERC Audits and Fraud Investigations
Beyond processing and disallowing claims, the IRS has signaled that it is stepping up enforcement around the Employee Retention Credit. The agency is intensifying audits and pursuing both civil and criminal investigations of potential fraud and abuse.
This posture reflects the scale of improper claims the IRS has identified. Businesses that worked with aggressive ERC promoters, especially those that guaranteed credits without reviewing eligibility, face elevated audit risk. The IRS has specifically warned about promoters who charged large contingency fees and filed claims for businesses that clearly did not qualify.
An ERC audit can occur before or after a credit is approved. Receiving a payment does not mean the claim will never be examined. Businesses should retain all documentation supporting their eligibility, including records of government orders, payroll data, gross receipts calculations, and any correspondence with ERC preparers. Working with a firm that offers risk advisory services can help a business assess its exposure before an examination begins.
What Businesses Should Do Now
Businesses with pending or paid Employee Retention Credit claims should take several steps to protect their position:
1. Confirm your filing dates and periods. Identify exactly when each claim was filed and which quarters it covered. Late-filed Q3 and Q4 2021 claims may now be barred from refund under the One, Big, Beautiful Bill, so this detail directly affects what you can expect.
2. Review your claim for accuracy. Compare your filing against the IRS red flags above. If you identify potential errors, address them proactively rather than waiting for the IRS to reach your file.
3. Organize your documentation. Gather all records that support eligibility, including government orders that affected operations, quarterly gross receipts figures, payroll records, and PPP loan forgiveness applications.
4. Monitor IRS correspondence. Watch for approval letters, disallowance letters, and audit notices, and respond within the stated deadlines. Missing a response window can forfeit your appeal rights.
5. Consult a qualified tax advisor. The ERC rules are complex and the enforcement landscape keeps shifting. A CPA or tax attorney can help you evaluate the strength of your claim and respond to any dispute.
The IRS resuming ERC processing is a positive development for businesses with legitimate claims, but it also means heightened scrutiny across the board. Preparation and professional guidance remain the best defenses against disallowance or audit.
Frequently Asked Questions
What is the Employee Retention Credit?
The Employee Retention Credit is a refundable tax credit created under the CARES Act to help businesses retain employees during the COVID-19 pandemic. Eligible employers could claim the credit for qualified wages paid during periods when operations were fully or partially suspended by a government order or when the business experienced a significant decline in gross receipts.
Is the IRS still processing ERC claims?
Yes. The IRS resumed processing Employee Retention Credit claims in August 2024 after lifting the moratorium that had been in place since September 2023. The agency prioritized clearly high-risk and clearly low-risk claims first, with moderate-risk claims taking longer.
Can I still file a new ERC claim?
No. The filing window for 2020 periods closed April 15, 2024, and the window for 2021 periods closed April 15, 2025. In addition, claims for the third and fourth quarters of 2021 filed after January 31, 2024, are barred from refund under the One, Big, Beautiful Bill.
Who was eligible for the Employee Retention Credit?
Businesses that experienced a full or partial suspension of operations due to a government order, or that had a significant decline in gross receipts compared with the same quarter in 2019, may qualify. Essential businesses that operated without restrictions and businesses that cannot document a qualifying government order generally do not qualify.
What should I do if I receive an ERC disallowance letter?
Review the Letter 105-C carefully and consult a tax advisor immediately. You can provide additional documentation, request an administrative appeal, or file suit in federal court, but a refund suit is generally subject to a two-year statute of limitations from the date of the disallowance notice. Act promptly to preserve your rights.
Can the IRS audit my ERC claim after I receive payment?
Yes. The IRS can audit or examine an ERC claim before or after the credit is approved and paid. Receiving a payment does not protect the claim from future review, so retain all supporting documentation.
