Key Takeaways:
- The IRS has prioritized ERC enforcement — focusing on eligibility, substantiation, and promoter-prepared claims.
- Many mid-market companies are under review or unclear on their ERC position, especially for Q3 2021 (a red flag for audits).
- CFOs should proactively review ERC filings, gather documentation, and consult with advisors to manage risk and avoid penalties.
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For most companies that claimed the Employee Retention Credit (ERC), the checks have long since cleared. But now the IRS is focusing on next steps — eligibility, substantiation, and calculation accuracy. Enforcement is no longer theoretical; it's already happening.
Thanks to extended statutes of limitations, expanded audit budgets, and a public crackdown on abuse, ERC compliance has become one of the IRS's highest priority areas.
Why the IRS Is Taking Aim
At its peak, the ERC offered up to $26,000 per employee, making it among the most generous pandemic-era incentives. But rapid rule change, shifting eligibility rules, and aggressive third-party promoters left many claims vulnerable to scrutiny.
This environment led the IRS to flag ERC as a "high-risk" credit and, in turn, prompted significant congressional attention. Every ERC claim from 2020–2021 — valid or not — is now within the audit scope.
The Impact of the OBBA
The One Big Beautiful Bill Act (OBBBA) has reshaped the IRS's enforcement strategy around the ERC. Enacted on July 4, 2025, the OBBBA:
- Disallows pending ERC claims for Q3 and Q4 of 2021 if they were submitted after January 31, 2024
- Preserves eligibility for taxpayers who filed prior to that date or already received refunds
- Extends the IRS statute of limitations for ERC audits from three years to six years
- Introduces new penalties, including a 20% penalty on erroneous refund claims — a provision previously only applied to income tax
- Adds due diligence standards for ERC promoters, requiring them to substantiate eligibility and amounts or face a $1,000 penalty per failure to comply
Importantly, professional employer organizations (PEOs) are excluded from these due diligence penalty rules.
With these expanded enforcement tools and clear audit triggers tied to filing dates, the IRS has a more defined roadmap for which claims to prioritize — and Q3/Q4 2021 claims will likely be at the front of the line.
Where Your Peers Stand
During a recent MGO-hosted webinar with mid-market tax and finance leaders:
- ~60% said they are undergoing ERC review (internal or external)
- ~10% expect a formal audit
- ~30% reported being unsure of their current ERC status
This uncertainty is what the IRS is targeting — and it's why companies need to revisit their filings now before the IRS does.
What the IRS Is Looking At
In early audits and soft letters, we're seeing recurring red flags:
- Eligibility assumptions based on vague shutdowns or indirect disruptions
- Wage overlaps with Paycheck Protection Program (PPP) forgiveness, resulting in double-dipping
- Missing or incomplete documentation (e.g., health orders, employee schedules)
- Claims prepared by outsourced firms without backup or compliance support
Even if your claim is technically sound, a lack of documentation can lead to disallowance or penalties.
What Should CFOs and Tax Leaders Do Now?
Rather than waiting for an IRS inquiry, take proactive steps:
- Conduct a thorough review of ERC claims — with focus on Q3 2021
- Compile all supporting documentation (eligibility rationale, employee records, payroll data)
- Request full backup from any third-party preparers, especially if a legal review wasn't performed
- Monitor for IRS soft letters or information documents requests (IDRs), which often precede formal audits
- Rescind your claim: If you have not received your ERC refunds or you have received your refunds and have not cashed them yet, and you are skeptical or uncomfortable with claiming the ERC, the IRS will allow you to rescind your claim for those quarters. Doing so may help you avoid penalties and interest.
Readiness isn't just about paperwork. It's about building a defendable position with confidence.
How MGO Can Support Your ERC Readiness
As enforcement ramps up, companies that take initial action will be best positioned to respond. Our ERC advisory professionals help clients evaluate risk exposure, gather proper documentation, and — when necessary — prepare for audit response or voluntary corrections. We work alongside CFOs, controllers, and tax teams to bring clarity and control to a complex compliance landscape.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
