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As a result of the COVID-19 pandemic, in March 2020, Congress passed the CARES Act that included a refundable credit called the employee retention credit (ERC). As the name suggests, the goal of the credit was to provide monetary aid to businesses to assist them in keeping workers employed during the pandemic. Eligibility for the ERC was based largely on whether the taxpayer’s business was fully or partially suspended by a governmental order, or if the business had a specified percentage decline in gross receipts. Some taxpayers did not claim the ERC on their initial tax returns, but later filed amended returns to retroactively claim the ERC.
Since its initial passage, Congress has made numerous changes to the ERC. These changes were implemented, in part, as an attempt to crack down on businesses that wrongfully claimed the ERC. Similarly, the IRS has, at times, halted ERC claim processing and the issuance of ERC refunds to taxpayers. Unfortunately, many of these changes have had a profoundly negative impact on businesses that validly claimed the ERC.
In its most recent change to the ERC, Congress passed the One Big Beautiful Bill Act (OBBBA) in July 2025. The OBBBA retroactively eliminated the ERC for the third and fourth quarters of 2021 for any claims led after Jan. 31, 2024. It also extended the statute of limitations for ERC claims led for the third and fourth quarters of 2021 from three years to six years, meaning the IRS has three additional years to initiate examinations of claims made for these quarters.
Perhaps as a result of this extended statute of limitations, the IRS has ramped up examinations of ERC claims. In recent articles, tax practitioners have reported seeing an uptick in audits of the ERC since June of this year. These IRS examinations often start with a letter, Letter 6612, which provide the taxpayer only 30 days to respond to the IRS and provide documentation demonstrating its entitlement to the credit. Many taxpayers and themselves unable to meet this quick turnaround time, while others timely provide documents to the IRS, but still end up with its ERC denied because of the IRS’s aggressive stance on these claims. Procedurally, once this happens, the taxpayer may have the option of administratively appealing the denial within the IRS. If the taxpayer’s administrative appeal fails, the only remaining recourse is to sue the IRS for refund by filing a lawsuit in the Court of Federal Claims or a U.S. district court.
Because of the increased IRS scrutiny of ERC claims, timing challenges associated with responding to the IRS, and the possibility that the taxpayer will have to file suit in federal court to receive its claim, taxpayers with unpaid claims, especially those under current examination and those that have already been denied, should consider proactively seeking legal advice. An experienced tax controversy attorney can assist the taxpayer in navigating the legal intricacies of ERCs, defending ERC examinations and using the court system to force the IRS to pay out ERC claims it has initially refused.
Kevin Sweeney, a shareholder at Chamberlain, Hrdlicka, White, Williams & Aughtry in Philadelphia, is an experienced tax attorney and former federal prosecutor who defends clients in civil and criminal tax controversy matters. Katherine Wheeler is an associate in the firm's tax controversy & litigation group in Philadelphia.
Reprinted with permission from the October 17, 2025, edition of The Legal Intelligencer © 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.