The era of aggressive claims under the Employee Retention Credit (ERC) is shifting into enforcement overdrive. With the IRS intensifying audits and recovery efforts, tax professionals must proactively navigate eligibility, documentation, and compliance. Discover how AI-driven platforms like our proprietary tool — built for AI tax research and AI tax planning — can streamline due diligence, flag red-flags, and provide clarity amid evolving guidance. Read on for key updates, risk mitigation strategies, and how an AI tax tool can sharpen your practice.
Understanding the ERC and the Crackdown
The Employee Retention Credit was introduced under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to support employers who retained staff during COVID-19 disruptions.
However, due to widespread misuse and aggressive promotions of the credit to ineligible businesses, the Internal Revenue Service (IRS) has launched a broad crackdown, including disallowance letters, voluntary disclosure programs, and moratoriums on new claims.
Why enforcement is intensifying
- The IRS estimates that only 10-20 % of submitted ERC claims present low risk, while 60-70 % show unacceptable risk of impropriety.
- The IRS is actively disallowing claims and issuing letters (for example, Letter 105-C) to taxpayers whose entities lacked paid employees during eligibility periods.
- Statutory periods for assessment are being extended — for Q3/Q4 2021 claims, the audit window may stretch to six years.
What this means for tax professionals
- Even legitimate-looking ERC claims require rigorous documentation and audit readiness.
- Promoters that base fees on a percentage of the credit amount or make broad eligibility claims (“every business qualifies”) present significant risk.
- Mistakes in handling the ERC affect not just payroll taxes, but also income tax returns (e.g., deduction reductions, recognition timing).
Key Compliance Considerations for ERC Claims
Below are critical checkpoints that tax professionals must address when evaluating or advising on ERC claims:
1. Eligibility assessment
- The business must have paid qualified wages between March 13 2020 and December 31 2021 (in most cases).
- For eligibility, look for either:
- A full or partial suspension of operations due to a government order, or
- A qualifying decline in gross receipts for the relevant quarter(s).
- A full or partial suspension of operations due to a government order, or
- Be especially careful with supply-chain disruption claims — the IRS is drawing tighter lines here.
2. Documentation and audit risk
- Maintain documentation of wages paid, gross receipts, government orders, and calculation worksheets.
- Accounting and financial professionals should consider recognition under ASC 450-30 and ASC 740 when the IRS may later disallow the credit.
3. Reporting and income tax implications
- The IRS in March 2025 updated its guidance: taxpayers who receive an ERC refund may now report it in the year of receipt rather than amending prior year returns in some cases.
- Importantly: if the credit was claimed, the deduction for wages must generally be reduced for that period.
4. Options if you filed an improper claim
- If you claimed the ERC but now believe you are not eligible, you may use the claim withdrawal process before the refund is paid.
- For paid claims, the IRS’s Voluntary Disclosure Programs (VDPs) allow repayment — typically at 80-85 % of the claimed amount — in exchange for avoiding penalties and limiting further exposure.
5. Beware of aggressive promoters
- The IRS has repeatedly cautioned that many promoters advertising easy access to the ERC are skipping legitimate eligibility analysis.
- Tax professionals must perform independent due diligence and document their risk assessment.
How an AI Tax Research & Planning Tool Can Help
In light of this crackdown, tax professionals need smarter, faster, and more comprehensive research and planning support. That’s where an AI-driven platform — like our tool built for AI tax research, AI tax planning, and agentic AI in tax workflows — becomes essential.
Benefits of AI tax research and planning
- Rapid eligibility scanning: Use AI tax research modules to cross-reference a client’s payroll data, government orders, gross receipts trends, and known IRS risk flags.
- Risk-flag identification: AI can highlight areas of higher audit risk (e.g., claims based solely on supply chain disruptions, entities with minimal employee count) and generate an audit readiness checklist.
- Document generation and workflow: Create templated worksheets, supporting documentation trackers, and client letters—all tied into the tax research system.
- Scenario modelling for tax planning: Use the AI tax planning tool to evaluate how the ERC interacts with other credits, impacts income tax deductions, and what actions to take in case of disallowance.
- Agentic AI in tax: By leveraging agentic AI workflows, your system can proactively surface new IRS guidance (e.g., March 20 2025 ERC FAQ updates) and auto-update the knowledge base across your client portfolio.
Recommended actions for tax professionals
- Incorporate an AI tax research tool into your workflow to automatically monitor guidance on ERC, scam indicators, and evolving statute of limitations.
- Use the AI tax planning module to simulate outcomes of both valid and invalid ERC claims, helping your clients understand potential liabilities.
- Set up internal controls using the tool to flag any clients referred by high-risk promoters and require enhanced documentation before proceeding.
- Offer value-added services: “ERC eligibility review,” “audit readiness memo,” and “voluntary disclosure planning” — enabled by AI research and planning insights.
Final Thoughts
The IRS crackdown on the Employee Retention Credit signals a clear message: lax documentation and aggressive, uninformed claims are no longer just a risk—they are a business-threat. As a tax professional, you face growing stakes in audit exposure, potential claw-back liability, and reputational risk.
By leveraging an advanced AI tax tool designed for AI tax research, AI tax planning, and agentic AI in tax operations, you can strengthen your service offering, protect your firm—and better serve clients in this shifting landscape.
Ready to transform how you handle ERC, audit exposure, and tax-planning intelligence? Schedule a demo of our AI tax platform today and stay ahead of the curve.