If you have received an IRS letter about your ERC claim, or if you claimed a large ERC refund and have not heard from the IRS yet, this page explains what the audit process looks like, what the IRS is targeting, and what your options are.

If you want to talk through your specific situation, book a free 15-minute call.

What Is the IRS ERC Audit Program?

The IRS launched a large-scale ERC compliance program beginning in 2023, targeting claims it identified as high-risk across several hundred thousand businesses.

In September 2023, the IRS announced a moratorium on processing new ERC claims and stated publicly that it had identified widespread fraud and abuse in the ERC program. The IRS began mailing letters to businesses with pending claims and, separately, opened examinations of businesses that had already received refunds.

The legal framework gives the IRS significant time to act. Under IRC § 6501, the IRS generally has three years from the date a return is filed to assess additional tax. But there are two important exceptions. First, if a taxpayer omits more than 25% of gross income, the statute extends to six years. Second—and more significantly for ERC—if the IRS determines that a return involved fraud or a willful attempt to evade tax, there is no statute of limitations at all. For claims the IRS characterizes as fraudulent, it can assess taxes at any time.

For ERC specifically, Congress extended the normal assessment period to five years under the American Rescue Plan Act of 2021. That means for most ERC claims on 2020 and 2021 returns, the IRS has until 2025–2026 to act—and for returns with fraud, indefinitely. The IRS is moving now because the deadlines are approaching.

What Triggers an ERC Audit?

The IRS is not auditing ERC claims randomly. It has identified specific patterns that it treats as high-risk, and most audits start with a computer-generated flag before a human examiner gets involved.

Based on IRS guidance and enforcement activity through 2025, the most common triggers are:

Refund Size

Large ERC refunds draw automatic scrutiny. The IRS cross-references refund amounts against payroll tax filings to identify claims that are disproportionate to reported wages. A claim that represents a significant percentage of your total payroll is more likely to be selected for examination.

Third-Party Promoter Involvement

The IRS has identified a list of ERC promoters it considers problematic and has audited clusters of their clients. If a promoter filed your ERC claim—particularly if they charged a contingency fee based on the size of your refund—there is a meaningful chance the IRS already has your file flagged. The IRS has also issued summonses to several promoters demanding client lists.

Unsupported Eligibility Theories

The IRS has published specific guidance identifying ERC claims it considers legally incorrect. Notice 2021-20 and Notice 2021-49 describe the eligibility rules in detail. The IRS has specifically called out several categories of questionable claims in IRS Notice 2023-56 and related guidance:

  • Supply chain disruption claims. Some promoters argued that any business affected by supply shortages qualified for the “full or partial suspension” test under IRC § 3134. The IRS takes the position that supply chain disruptions alone are not a qualifying governmental order and has been disallowing these claims.
  • Broad revenue-decline arguments. The revenue reduction test has specific thresholds: greater than 50% decline for 2020 quarters and greater than 20% for 2021 quarters, compared to the same quarter in 2019. Claims that use cherry-picked comparison periods or alternative revenue definitions are high-risk.
  • Essential business claims. Businesses that remained fully open and operational during government shutdown orders generally do not qualify under the suspension test, even if they were technically classified as essential businesses. Some promoters argued otherwise.
  • Nominal impact claims. The IRS has stated that a governmental order must have more than a nominal impact on business operations to support an ERC claim. Claims based on minor or speculative effects are frequently disallowed.

Certain Industries

The IRS has acknowledged targeting specific industries where it identified high concentrations of problematic claims, including restaurants and food service, construction, healthcare, and professional services firms. This is not because these industries were ineligible—many had legitimate claims—but because promoters heavily marketed to them.

 

What Is the IRS ERC Disallowance Letter (Letter 105-C)?

Letter 105-C is the IRS’s formal notice that it has denied your refund claim. For ERC, it is the document that starts your appeal clock.

If the IRS disallows your ERC claim—either after an examination or through its accelerated review process—it will send you Letter 105-C, Claim Disallowed. The letter explains the basis for the disallowance, the amount at issue, and your rights.

Two deadlines matter from the date you receive Letter 105-C:

  • 30 days to file a protest with IRS Appeals. If you disagree with the disallowance, you can request a hearing with the IRS Independent Office of Appeals. Your protest must explain the factual and legal basis for your disagreement. Missing the 30-day window generally forecloses the administrative appeal route.
  • Two years to file suit in court. Under IRC § 6532(a), you have two years from the date of the disallowance notice to file suit in U.S. District Court or the U.S. Court of Federal Claims for a refund. If you have already paid the tax and want it back, this is your path.

Some businesses receive Letter 105-C without ever having had a formal examination. The IRS has been using an expedited disallowance process for claims it considers clearly improper, sending disallowance letters based on its own review without opening a standard audit. The appeal rights are the same either way.

There is also a related letter—Letter 6577-C—which the IRS has been sending to businesses with pending ERC claims to notify them that their claims are being reviewed and may be disallowed. This is not a final disallowance, but it signals that an examination is likely.

If you have received either letter, the single most useful thing you can do is respond in writing before any deadlines run. Silence is not a neutral act in an IRS examination.

ERC Repayment: What Does the IRS Require?

If the IRS determines your ERC was improper, it will demand repayment of the refund amount, plus interest, and potentially penalties.

The mechanics of an ERC repayment demand depend on whether the IRS is acting through a formal examination or through a separate enforcement action.

Through a Formal Examination

If the IRS opens an examination of your payroll tax returns (Form 941), the examiner will review your ERC eligibility documentation and, if it finds problems, will propose adjustments. You will receive a report—typically a Form 4549-A, Income Tax Examination Changes, or the payroll tax equivalent—showing the proposed disallowance. You then have the right to agree, disagree and go to Appeals, or, if the examination closes unfavorably and you pay the assessed amount, sue for a refund.

Interest and Penalties

The IRS charges interest from the date of the original refund on any amount it determines was improperly paid. The federal short-term rate plus 3% applies under IRC § 6621. On top of that, the IRS may assert:

  • A 20% accuracy-related penalty under IRC § 6662 for underpayments due to negligence or disregard of rules.
  • A 20% civil fraud penalty under IRC § 6663 if the IRS determines any part of the underpayment was due to fraud.
  • Promoter penalties under IRC § 6700 if your business was involved in organizing or selling the ERC arrangement.

The good news is that penalties are contestable. Reasonable cause is a defense to the accuracy-related penalty under Treas. Reg. § 1.6664-4. If you relied on professional advice to claim the ERC, document that reliance—who advised you, what they reviewed, what they said.

Timeline

Once the IRS issues a formal assessment, you will receive a Notice and Demand for Payment under IRC § 6303. At that point, the IRS generally has 10 years from the assessment date to collect under IRC § 6502. Interest continues to run during that period. The IRS can levy bank accounts and receivables, issue wage levies, and file federal tax liens—all without a court order—once a levy notice is issued and the 30-day response period passes.

If repayment of the full amount is not immediately possible, installment agreements and collection alternatives exist. The right approach depends on the size of the liability, your current financial position, and whether you are also contesting the underlying assessment. For a detailed look at what representation costs, see our page on ERC attorney fees.

The ERC Voluntary Disclosure Program — What It Was and Whether It Is Still Available

The IRS ran an ERC Voluntary Disclosure Program from January through March 2024. The program is closed. Businesses that did not participate are now subject to the full examination and assessment process.

The ERC Voluntary Disclosure Program (VDP), announced under IRS Announcement 2024-3, allowed businesses that had received ERC refunds they believed were improper to come forward and repay 80% of the refund—keeping 20%—in exchange for the IRS’s agreement not to assert penalties or pursue criminal referrals. The business also had to provide information about any promoter that advised the claim.

The VDP was a relatively favorable resolution for businesses that had claimed ERC improperly and knew it. Eighty cents on the dollar, no penalties, and finality.

The IRS closed the VDP in March 2024. It has not announced a second window as of May 2026. If your business did not use the VDP, your options now are:

  • Respond to an active examination and defend the claim on the merits.
  • Withdraw a pending claim before the IRS processes it, using Form 941-X. This avoids a refund you would have to repay, but does not eliminate exposure for periods already closed.
  • Contest a disallowance through Appeals if you have received Letter 105-C.
  • Negotiate a resolution if the IRS has already assessed and you owe money.

The VDP option is gone for now. What remains is the normal examination, assessment, and appeals process—which is not inherently bad, because many ERC claims have legitimate legal defenses that the IRS’s automated review missed.

Appeal Rights After an ERC Disallowance

A disallowance letter is not the end of the road. The IRS Appeals process exists to resolve these disputes, and it is independent of the examining agent.

The IRS Independent Office of Appeals is a separate function from Compliance. Appeals officers are not trying to build a case against you—their job is to settle cases based on the hazards of litigation. For ERC claims, that means they will look at the actual legal merits of your eligibility position and weigh whether the IRS could sustain its disallowance in court.

To go to Appeals after receiving Letter 105-C, you file a written protest within 30 days explaining your position. The protest should include:

  • Your name, address, and the tax periods at issue.
  • A clear statement of the facts supporting your ERC claim, including the specific governmental orders or revenue decline that formed the basis of your eligibility.
  • The legal authority supporting your position—typically the relevant provisions of IRC § 3134 and the applicable IRS notices.
  • The specific items you disagree with and why.

A well-constructed protest creates a record. Even if Appeals sustains the disallowance, the record you built matters if you later go to court.

For claims involving larger amounts, the Appeals conference may be your best opportunity to resolve the matter without litigation. ERC cases are fact-intensive, and the factual record you present—board minutes, operational records, governmental orders, payroll documentation, revenue records—directly determines whether your legal position holds. Appeals is not the place to argue for the first time; it is the place to show the work you have already done.

If Appeals sustains the disallowance and you have already paid the amount, you can file suit in U.S. District Court or the U.S. Court of Federal Claims within two years of the disallowance. The court process is more expensive and slower, but for larger amounts it may be warranted.

Third-Party Promoters and Business Owner Liability

The IRS is pursuing promoters and businesses separately. The fact that a promoter filed your claim does not automatically shield you from liability.

Many businesses that received improper ERC refunds did not understand what they were claiming. They were approached by promoters—sometimes accountants, sometimes marketing firms operating under names like “ERC Specialists” or “ERC Fast Track”—who guaranteed large refunds and charged contingency fees ranging from 15% to 30% of the refund amount. Many promoters made representations about eligibility that were legally wrong.

The IRS knows this. In its public guidance, it has acknowledged that some business owners were misled. But the legal standard is not good faith alone—it is reasonable cause. The distinction matters.

The Responsible Person Issue

The ERC is a credit against payroll taxes. Under IRC § 6672, the IRS can assess a trust fund recovery penalty against any person who is responsible for collecting, accounting for, and paying over payroll taxes and who willfully fails to do so. This same mechanism can apply to ERC repayment. If your business owes ERC repayment and cannot pay, the IRS can assess the liability personally against owners, officers, or other responsible persons.

The “willfulness” standard under § 6672 is not as high as it sounds. Courts have found willfulness when a responsible person knew of the tax obligation and consciously disregarded it. If a business owner knew the ERC claim looked questionable, received the refund anyway, and used the funds, that fact pattern could support a willfulness finding.

Criminal Exposure

For most businesses that received improper ERC refunds, criminal prosecution is not the likely outcome. The IRS and DOJ are focused primarily on the promoters who organized the schemes and on egregious cases involving large amounts and clear fabrication.

That said, if your ERC claim involved falsified records, fabricated employees, or other conduct that goes beyond a questionable eligibility position, the analysis changes. We represent businesses and individuals facing that kind of exposure. For more on what that looks like, see our ERC criminal defense page.

How to Defend an ERC Audit

Most ERC audits are won or lost on documentation. The legal standard is clear; the question is whether your records support it.

An ERC claim under IRC § 3134 requires one of two things: (1) a full or partial suspension of operations due to a governmental order, or (2) a significant decline in gross receipts. Both are fact-specific inquiries. The IRS examiner will ask for documentation supporting whichever theory you used.

For Governmental Order Claims

The IRS requires you to identify the specific governmental order—federal, state, or local—that caused the suspension or partial suspension of your business operations. General “COVID-19 restrictions” is not an order. You need the specific order, the specific impact on your specific operations, and evidence that the impact was more than nominal. Notice 2021-20, Q&As 11–22, and Notice 2021-49 describe the analysis the IRS applies.

Your documentation package should include: the relevant governmental orders, a written description of how your business was specifically affected, any operational changes you made in response (reduced hours, reduced capacity, closed departments), and records showing the timing of those changes.

For Revenue Decline Claims

Revenue decline claims are comparatively cleaner to document—the numbers are either there or they are not. The 2020 threshold is a greater-than-50% decline in gross receipts for any calendar quarter compared to the same quarter in 2019. The 2021 threshold is greater-than-20%. You need your quarterly gross receipts for 2019, 2020, and 2021, which should be on your income tax returns and in your books.

If your revenue decline claim was calculated incorrectly—using the wrong comparison periods, wrong revenue definition, or wrong entities—it is worth going back through the math before the examiner does.

What to Gather Before the Audit

Before responding to an IRS ERC examination, gather:

  • All Form 941 and Form 941-X filings for the quarters at issue.
  • Payroll records showing qualified wages for each employee in each quarter.
  • The governmental orders your claim was based on, if applicable.
  • Quarterly revenue records for 2019–2021, from your books and tax returns.
  • Any advice you received from the promoter or preparer who filed the claim, including engagement letters, calculations, and correspondence.
  • Corporate records, board minutes, and any internal communications documenting the operational impacts you experienced.

Going into an IRS examination without organized documentation is the most avoidable mistake we see. The IRS does not give credit for records you theoretically had but cannot produce.

Do You Need an ERC Audit Attorney?

An ERC audit is a legal proceeding. The eligibility standards are in the tax code, the IRS’s position is grounded in administrative guidance, and the appeal rights are procedural.

Whether you need representation depends on a few factors: the size of the claim at issue, how complex your eligibility position is, and whether you have received a formal examination notice or a disallowance letter. For smaller claims built on a straightforward revenue decline, some businesses can navigate the examination on their own. For claims in the six or seven figures, claims based on governmental order theories, or situations where the IRS has raised fraud or accuracy penalties, representation is worth having.

An attorney provides two things an accountant cannot: attorney-client privilege and the ability to appear in Tax Court, District Court, or the Court of Federal Claims if the case goes to litigation. ERC disputes that involve questions of law—whether a particular governmental order qualifies, whether a particular business activity counts as “more than nominal” suspension—are legal arguments. They require legal analysis.

For a detailed breakdown of what ERC representation typically costs at each stage of the process, see our page on ERC attorney fees.

If you want to talk through where your situation stands, book a free 15-minute call. We can usually tell you in the first conversation whether we think your claim has a defensible position and what the IRS is likely to focus on.