Pandemic-era ERC started with good intentions, ending with frustration

The pandemic-era employee retention credit (ERC) officially ends April 15, but its legacy will live on in delayed payments to the businesses it was designed to help, fraudulent activity related to its claims, and confusion not only for taxpayers and tax professionals but also for the IRS.

But, first, a reminder that when Congress created the ERC in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, it did so as COVID-19 had just started rippling through the country.

The ERC is “a story of people’s lives. It’s a story of what you were doing during COVID. It’s a story of what you did to adjust to these unprecedented times, especially when you’re talking about the suspension orders,” said James Creech, senior manager with the tax advocacy and controversy group at Baker Tilly.

ERC background

The ERC was designed to help certain businesses continue paying employees during the pandemic while operations were either fully or partially suspended due to a government order or when the businesses had a significant decline in gross receipts during the eligibility periods. It was generally available to eligible businesses from March 31, 2020, to Sept. 30, 2021, and until Dec. 31, 2021, for recovery startup businesses.

But then came the ERC promoters and mills, muddying the waters for businesses, tax professionals, and the IRS. To counter a flood of claims resulting from those promotions, the IRS imposed a moratorium in September 2023 on processing claims submitted after Sept. 14, 2023. In August 2024, the IRS said it would process claims filed between Sept. 14, 2023, and Jan. 31, 2024.

The IRS opened a claim withdrawal process in September 2023, open to business owners who doubted the legitimacy of their claims. It followed that offer with a voluntary disclosure program in December 2023, allowing qualifying businesses to repay 80% of the credit they received and exempting them from an audit on the ERC claim.

When Congress did not pass a bill that would have retroactively changed the statute of limitation to file a claim to Jan. 31, 2024, and would have also extended the statute of limitation to six years for auditing ERC claims, the IRS acted again in August 2024.

The agency sent 28,000 disallowance letters to businesses and started processing 50,000 refund claims that were filed between Sept. 14, 2023, and Jan. 31, 2024. It opened a second voluntary disclosure program with slightly less favorable terms than the first.

The fraud resulted in thousands of investigations by IRS-Criminal Investigation (IRS-CI), which has begun 2,039 tax and money laundering cases related to COVID-19 that total $10 billion in attempted fraud. The cases include a broad range of criminal activity, including fraudulently obtained loans, credits, and payments meant for American workers, families, and small businesses, IRS-CI said in a news release.

As of Feb. 28, 1,028 people have been indicted on COVID-related crimes, and 569 individuals have been sentenced to an average of 31 months in federal prison.

An IRS spokesman said by email April 3 that the agency did not have figures for ERC claims filed or processed. In November, the national taxpayer advocate said the IRS could have about 1 million ERC claims remaining to process by the end of 2024.

Slow process

While approvals of ERC claims have started trickling out to taxpayers, the process has been frustratingly slow and inconsistent. For instance, the IRS does not assess each set of claims from a single business at the same time.

When the owner of a small oil and gas business in Texas spoke anonymously with the JofA in June, he was waiting on $50,000 in claims that his trusted payroll company had filed for him in December 2022. Two years later, in early December 2024, he received payment for three quarters, totaling $30,000 plus interest. He was told in a phone call with the IRS in late March that one of the remaining two claims, which was for $15,000, is in the process of being paid, leaving him with $5,000 outstanding.

“The whole process is riddled with issues,” he said in an email. “My company does not exhibit even one of the characteristics of the fraudulent claims that were listed by the IRS. Yet, we were first ignored for many months (not assigned for review), then thrown in the fraud pool stalemate with all the obvious fraud artists.”

Four reviewers handled his four claims; the fifth claim has not been assigned, he said.

“As poorly as the system worked, if one agent was assigned to and reviewed all five claims, we would have finalized the process in early December 2024,” he said. “Yet here we are in April 2025 still waiting for the process to end.”

Attorney Steve Klitzner, whose practice specializes in resolving disputes with the IRS, said that, on average, he receives one acceptance a month and one denial. He has not received a client file he requested a year ago from the IRS via a Freedom of Information request.

“I get the feeling that the IRS went from everybody’s entitled to the ERC, let’s pay everybody, to no one’s entitled to the ERC, everyone’s a fraud,” he said. “It doesn’t seem like there’s a lot of middle ground there.”

Chris Wittich, CPA, a partner with Boyum Barenscheer in Minneapolis, said he has found no rhyme or reason to how the IRS decides which quarters to pay.

“It’s entirely haphazard,” he said on an episode of the AICPA’s Tax Section Odyssey podcast. “It makes no sense. It’s not like the high-risk quarters are taking the longer than the low-risk. It’s just like a grab bag as to what you’re going to get and when you’re going to get it.”

Originally, Wittich told clients that the IRS could take up to 18 months to settle an ERC claim, “which is kind of ludicrous time frame to start with,” he said. And now that’s it been 18 months, he tells them, “Let’s keep waiting. Really, there’s nothing you can do.”

Creech, however, said the ERC approval backlog is loosening for his clients.

“We are seeing movement,” he said. “I don’t think waiting is such a fool’s errand at this point. It’s a trickle, but it’s better than nothing.”

Waiting, he said, “seems like a decent strategy because we are seeing money coming out, and we are seeing some of the payments. It’s not fast, and it’s not everybody getting a check all at once, but it’s promising.”

IRS issues FAQs

The IRS issued five new FAQs in March that mainly addressed how to handle the ERC on tax returns under various scenarios.

The FAQs are not authoritative guidance but do “provide us with answers to some of the questions we’ve been having around the issue of the statute of limitation expiring,” April Walker, CPA, CGMA, lead manager–Tax Practice & Ethics, AICPA & CIMA, said on the podcast episode with Wittich.

The FAQs, added March 20, cover:

• Does the ERC affect an income tax return?
• Should a taxpayer have reduced the wage expense on their income tax return when filing for the ERC?
• What do taxpayers do when they claimed the ERC but did not reduce wage expenses on the income tax return, and the ERC claim was paid in a subsequent year?
• What can taxpayers do if the ERC claim was disallowed but they had already reduced the wage expense on their income tax return by the amount of the ERC they expected?
• How does someone report ERC fraud?

Resources

The AICPA Tax Section’s ERC resources page is designed to help members understand the credit and the IRS claims processing process.

The IRS maintains a lengthy list of ERC FAQs.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.