Employee Retention Credit Aftermath: Amended Returns, IRS Audits, Voluntary Disclosure, and What to Do If You Claimed ERC

By Yarik Yarosh, CPA ·September 5, 2026 ·7 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

The Employee Retention Credit has become the most audited tax provision in recent IRS history. Under IRC 3134 (2021) and the CARES Act Section 2301 (2020), eligible employers could claim a refundable credit against payroll taxes for qualified wages paid to employees during periods when the business was either subject to a government order that partially or fully suspended operations or experienced a significant decline in gross receipts. The credit was 50% of up to $10,000 in qualified wages per employee for all of 2020 (maximum $5,000 per employee) and 70% of up to $10,000 in qualified wages per employee per quarter for 2021 (maximum $7,000 per employee per quarter, or $21,000 for the first three quarters). An infrastructure bill retroactively ended the credit for most employers after September 30, 2021 (Q3 2021), with an exception for recovery startup businesses through December 31, 2021 (Q4 2021). The IRS has stated that 60-70% of ERC claims contain errors or are potentially fraudulent, and it’s processing claims through a filter that categorizes them into three groups: those that clearly qualify (processed normally), those that clearly don’t qualify (disallowed with a letter), and those that require additional review (held for audit). Businesses that received ERC payments they were not entitled to face repayment of the credit plus penalties and interest, and in egregious cases, criminal prosecution.

✓Key takeaway

ERC eligibility requirements:

Test	2020 (CARES Act)	2021 (IRC 3134)
Government order test	Full or partial suspension of operations due to a government order	Same
Gross receipts test	More than 50% decline in gross receipts vs. same quarter in 2019	More than 20% decline vs. same quarter in 2019
Credit rate	50% of qualified wages	70% of qualified wages
Per-employee cap	$10,000 total (all of 2020)	$10,000 per quarter
Maximum credit per employee	$5,000 (2020)	$7,000/quarter x 3 quarters = $21,000 (2021)
Maximum total per employee	$26,000 ($5,000 + $21,000)
Large employer threshold	100+ full-time employees (2020); 500+ (2021)	Large employers: credit only on wages for time NOT worked
PPP interaction	Cannot use the same wages for both PPP forgiveness and ERC	Same

IRS enforcement status (2025):

Action	Status
Moratorium on processing new claims	In effect since September 2023
Audit program	Active; tens of thousands of audits underway
Disallowance letters	Being issued for claims identified as ineligible
Voluntary Disclosure Program (VDP)	Available for businesses that received improper payments
ERC Claim Withdrawal Program	Available for claims that haven’t been processed
Criminal prosecutions	Active against promoters and some employers

What should you do if you claimed the ERC?

Hypothetical example

Round numbers. For current guidance, see IRS Publication 15 (Employer Tax Guide). A business claimed $280,000 in ERC across 2020 and 2021 for 20 employees. The claim was filed by a third-party promoter who charged a 25% contingency fee.

If the claim was legitimate:

Item	Details
Document the government order	Specific order (state, county, city) that suspended or partially suspended operations
Document the impact	How the order affected the business (reduced hours, closed locations, limited capacity)
OR document gross receipts decline	Quarterly gross receipts compared to the same quarter in 2019
Ensure PPP wages are excluded	Wages used for PPP loan forgiveness can’t also be used for ERC
Maintain records	Payroll records, government orders, gross receipts calculations, PPP application and forgiveness documentation

If the claim was questionable or ineligible:

Situation	Best Action
Claim not yet processed (still pending)	File a Claim Withdrawal (no repayment, no penalties, no interest)
Claim processed, refund received, but claim was improper	Voluntary Disclosure Program (VDP)
Claim processed, refund received, claim was partially correct	Amend Form 941-X to correct the claim amount

Voluntary Disclosure Program (VDP) terms:

Feature	Details
Repayment amount	80-85% of the ERC received (15-20% reduction)
Penalties	Waived
Interest	Waived
Payment plan	Available (installment agreement)
Audit protection	IRS generally will not audit the ERC claim if VDP is completed
Promoter fee recovery	Business should attempt to recover the promoter’s contingency fee

Example:

Item	Amount
ERC received	$280,000
Promoter fee paid (25%)	$70,000
Net received by business	$210,000
VDP repayment (85% of $280,000)	$238,000
Out-of-pocket cost to the business	$238,000 - $210,000 = $28,000
Penalty avoided (20% accuracy penalty on $280,000)	$56,000
Interest avoided (approximately)	$30,000+
Net savings from VDP vs. audit	$58,000+

If audited by the IRS:

Outcome	Consequence
Claim upheld (fully eligible)	No change; keep the credit
Claim partially disallowed	Repay the disallowed portion + 20% accuracy penalty + interest
Claim fully disallowed	Repay 100% + 20% penalty + interest; potential 75% civil fraud penalty
Criminal referral (fraud)	Criminal investigation; potential prison time (up to 5 years per count)

Disallowance example (full audit):

Item	Amount
ERC received	$280,000
IRS disallows 100%	Repay $280,000
Accuracy penalty (20%)	$56,000
Interest (2 years at ~8%)	$44,800
Total owed	$380,800

Red flags the IRS is looking for:

Red Flag	Why
No specific government order identified	Many promoters claimed a vague “COVID impact” without identifying the specific order
Supply chain disruption claim	The IRS has narrowed this category significantly; most supply chain issues do not qualify
Gross receipts test not met	Some promoters used creative accounting to manufacture a decline
Same wages used for PPP and ERC	This is explicitly prohibited
Claim filed for Q4 2021 (non-recovery startup)	Credit ended after Q3 2021 for most employers
Large refund relative to business size	$500,000+ ERC for a 10-person business raises scrutiny
Promoter charged contingency fee	The IRS views contingency-fee ERC mills as a major source of fraudulent claims

Income tax impact of ERC:

Item	Details
ERC reduces the wage deduction	The amount of the ERC reduces the deductible wage expense (you cannot deduct wages and also claim a credit on the same wages)
If ERC is repaid	The wage deduction is restored for the year the repayment is made (or amended return for the original year)
Timing	The wage deduction reduction should have been reported in the year the ERC was claimed (not when received)
Common error	Many businesses claimed the ERC but did not reduce their wage deduction on the income tax return, resulting in a double benefit

Illustrative numbers only, not a real client and not advice for your facts.

How does this affect my quarterly estimated tax payments?

Any change in your tax situation during the year should prompt a recalculation of estimated tax payments. The IRS requires quarterly payments if you expect to owe at least $1,000 in tax after subtracting withholding and credits. The safe harbor rules protect you from the underpayment penalty: pay either 100% of last year’s tax liability (110% if your AGI exceeded $150,000) or 90% of the current year’s liability. If your income is uneven during the year, the annualized income installment method (Form 2210, Schedule AI) lets you match payments to when income was actually earned, potentially reducing or eliminating the underpayment penalty. Quarterly payment deadlines are April 15, June 15, September 15, and January 15 of the following year.

Want this checked against your own situation?

Start with a Diagnostic: a CPA licensed in the US and Canada reads your file and tells you in writing what's wrong and how to fix it, three to four business days after you finish the questions. The report is $250. If you hire us for any work after that, you get the $250 back as a discount on that work. Or send us your return or your letter and get a fixed price, free.

Start a Diagnostic →See prices

Get a fixed price, free

Get the next cross-border guide by email

One or two plain-English guides a week on US-Canada tax. No spam, unsubscribe anytime.

Cite this page

Yarik Yarosh, CPA. "Employee Retention Credit Aftermath: Amended Returns, IRS Audits, Voluntary Disclosure, and What to Do If You Claimed ERC." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-tax-implications-employee-retention-credit-erc-aftermath

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.

Employee Retention Credit Aftermath: Amended Returns, IRS Audits, Voluntary Disclosure, and What to Do If You Claimed ERC

What should you do if you claimed the ERC?

How does this affect my quarterly estimated tax payments?

Related guides