IRS Issues New Guidance on ERC Claims

The Internal Revenue Service (IRS) continues to focus on auditing companies that have claimed the Employee Retention Credit (ERC), including further refining its interpretations of ERC eligibility and documentation requirements.

IRS ERC update answers 3 critical questions

On March 20, 2025, the IRS updated the Frequently Asked Questions (FAQ) page for the ERTC, adding new clarification under the “Income Tax and ERC” section. The update addresses three questions that have been a source of uncertainty for taxpayers and their advisors.

1. Should the taxpayer have reduced the deduction for wages on the income tax return for the year in which the ERC was filed?
2. What should a taxpayer do if they claimed an ERC, did not reduce their wages, and then received the ERC in a subsequent tax year?
3. Is there relief for taxpayers who previously reduced their wages and then found out in a subsequent tax year that their ERC claim was denied?

The answer to the first question is yes. Taxpayers who were eligible for the ERC had a right or reasonable expectation of reimbursement for qualified wage expense in the amount of the claimed ERC. Therefore, taxpayers who filed an ERC claim should have reduced the deduction for wages in the year the ERC claim was filed.

The answer to the second question is that taxpayers are not required to file an amended return or, if applicable, an administrative adjustment request (AAR) to address the overstated wage expenses. Instead, taxpayers include the overstated wage expense amount as gross income on the income tax return for the tax year the ERC is paid.

The answer to the third question is that affected taxpayers have two options. They can either increase their wage expense on the tax return for the year they were notified of the denial, or amend the tax return for the year they reduced their wage expense by the amount of the ERC claim. Affected partnerships may need to file an AAR instead of filing an amended tax return.

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