IRS Releases New Guidance Concerning ERC Refunds

The IRS has released much-anticipated guidance clarifying how businesses should treat Employee Retention Credit (ERC) refunds—particularly in cases where wage deductions weren’t adjusted, or a claim is later disallowed. The goal is to ease compliance burdens and help taxpayers avoid being penalized on both sides of a transaction—commonly referred to as a “whipsaw” assessment.

What’s Entailed in the New Guidance?

To support this objective, the IRS has issued FAQs that outline specific relief measures for two common scenarios. The guidance offers greater flexibility in reporting and helps resolve lingering questions about how and when to account for ERC-related adjustments on income tax returns. Here’s are the two most common situations clarified by the IRS and how the updated guidance provides relief.

1. You Received an ERC Refund but Didn’t Amend Your Income Tax Return

Previously, businesses that received an ERC refund were expected to amend their prior-year income tax returns to reduce the wage expense claimed as a deduction. The new guidance now offers a simpler option: you may report the ERC refund as income in the year it is received, rather than amending the prior return.

Example: A business claimed an ERC of $700 for tax year 2021 based on $1,000 of qualified wages but did not reduce its wage expense on the 2021 tax return. In 2024, the business receives the $700 ERC refund.Under the new guidance, the business can report the $700 as income on its 2024 tax return—eliminating the need to amend the 2021 filing.

2. You Received an ERC Refund, Reduced Wage Expense, and the Refund Was Later Disallowed

Some businesses received their ERC refund and proactively reduced their wage expense on their original income tax return, expecting the credit to be allowed. However, if the IRS later audits and disallows the claim, this could result in a “whipsaw” scenario—where the credit must be repaid, but the associated wage deduction has already been lost. With the new guidance, if your ERC claim is ultimately disallowed and you do not contest the decision, you no longer need to amend the original return. Instead, you can increase your wage expense in the tax year when the disallowance becomes final.

Example: A business claimed the ERC for tax year 2021 and reduced its wage expense accordingly. In 2024, the IRS disallows the credit, and the business does not challenge the decision. Under the new guidance, the business may increase its wage expense on the 2024 return to reflect the disallowed credit—avoiding the need to amend the 2021 return.

Need Help Interpreting the Guidance?

If you’re unsure how this new guidance impacts your business or need assistance reviewing your ERC claims and income tax returns, contact your CRI advisor today. We’ll guide you through the process and help keep your filings accurate and compliant so you can move forward with confidence and peace of mind.