By Marcus J. Brooks & Ashley P. Withers

It has been one year since the One Big Beautiful Bill Act (the “OBBBA”) made significant changes to how the IRS deals with Employee Retention Credits, or “ERCs,” a refundable payroll tax credit for qualifying businesses that kept employees on their payroll during the COVID-19 pandemic. Thousands of businesses applied for this credit in 2020 through early 2024. Today, we are seeing new trends emerge from the IRS, with businesses across all industries feeling the impact.

ERC Refund Checks Are Still Being Issued, but with Risks

Some businesses that filed an ERC claim years ago are just now receiving an ERC refund check in the mail. These checks prompt some businesses to question “What is this check for?” and “Can I keep it?” For businesses finding themselves in this situation, it is critical that they consult with a qualified tax professional before depositing or cashing the check.

Receipt of an ERC refund check does not mean that the business is “in the clear” with respect to its ERC claim. Rather, in many cases, the IRS can still audit the business’s ERC claim. If the assigned IRS auditor concludes that the ERC claim was improper, the IRS can be expected to demand full repayment plus penalties and interest. For businesses considering a prospective sale or other large transaction, such an IRS demand can create an untenable roadblock in the transaction.

One way out of this predicament is by officially “withdrawing” the ERC claim. Businesses who pursue this route are treated by the IRS as if they never filed an ERC claim with no penalties or interest imposed. The ERC withdrawal process is fairly straightforward, but one critical requirement is that the taxpayer needs to have not deposited or cashed any ERC refund check. Consequently, businesses that have received an ERC refund check should consult with a qualified tax professional before depositing or cashing a refund check. Even for businesses that decide to deposit or cash the ERC refund check, a qualified tax professional can help the business think through ways to potentially mitigate risk with respect to the ERC claim.

Increased IRS Pushback

On the other end of the spectrum, many businesses are in the throes of defending an ERC claim at the examination stage or IRS Independent Office of Appeals level. In these situations, we are seeing an increase in the denial of ERC claims with similar results at the IRS appellate level. Taxpayers are increasingly being forced to take affirmative action to collect or retain their ERC refund. In these cases, taxpayers face a strict two-year deadline to resolve the matter with the IRS or file suit in federal court. The two-year deadline begins when the IRS initially disallows the ERC claim. Once the two-year timetable expires, the taxpayer is barred from recovery.

Two ways to avoid such a harsh result are to (1) file suit in federal court, or (2) extend the statute of limitations by filing a completed IRS Form 907 Agreement to Extend the Time to Bring Suit. Both routes need to be handled with care.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice. For more information, please contact a member of the Tax practice.

Meet Marcus

Marcus J. Brooks practice focusing on tax controversy and litigation. He represents clients in income and transfer tax matters during audits, before the IRS Appeals Office, and in federal and state courts. He advises on federal and state tax issues related to business transactions and compliance, serving private and public companies, investment funds, estates, and individuals. His broad expertise covers partnership, corporate, and international tax, as well as transfer pricing and state tax issues. Marcus frequently acts as outside general counsel, providing strategic advice on complex business and legal matters.

Meet Ashley

Ashley P. Withers helps businesses and taxpayers with federal tax matters that impact their lives. In her tax controversy practice, she has successfully defended clients in IRS audits and appeals and secured favorable private letter rulings. Most recently, she secured a finding of “no deficiency” for an employer undergoing a complex employee retention credit (ERC) tax audit involving a potential $1 million+ tax liability. In her transactional practice, she helps buyers and sellers think through how to appropriately address pre- and post-closing tax liabilities, including potential ERC liabilities.