How the IRS is examining ERC claims in 2026: documentation, denials, and reconsideration

The Employee Retention Credit is no longer a fresh pandemic relief program. In 2026 it is an enforcement, substantiation, and refund-claim controversy program. Employers are generally not filing new timely ERC claims for 2020 or 2021 quarters anymore; they are waiting on old Forms 941-X, receiving partial or full disallowance letters, deciding whether to withdraw unprocessed claims, responding to IRS information requests, or preparing an administrative appeal before the two-year refund-suit window closes.

The reason the IRS examination posture is so strict is visible in its own public releases. In IR-2024-169, the IRS said its review covered more than 1 million ERC claims representing more than $86 billion and that tens of thousands of high-risk claims would be denied. In IR-2024-203, the agency said it would move more legitimate claims into processing while continuing denials, audits, and civil and criminal investigations. In IR-2024-212 and IR-2024-213, it reopened a second Voluntary Disclosure Program for received but problematic 2021 ERC refunds. Those announcements are the backbone of the 2026 examination environment.

An employer should read those releases as operational guidance, not just news. The IRS is sorting claims by risk indicators, paying some lower-risk claims, denying some claims before full audit development, and examining paid claims when the facts do not line up with the statutory eligibility tests. A file that made sense to a promoter in 2023 may be weak in 2026 if it cannot identify a government order, cannot reconcile gross receipts, cannot allocate PPP wages, or cannot explain why the claimed wages were paid to employees who met the qualified-wage rules for the quarter.

The first examination step is usually not a philosophical debate about pandemic disruption. It is a return-processing trail. For most quarterly employers, the ERC was claimed retroactively on Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund. The IRS Form 941-X page, updated for 2026, states the form is used to correct errors on a previously filed Form 941. The April 2026 Form 941-X revision also makes the amended-return choice explicit: the employer selects either the adjustment process or the claim process, and files a separate Form 941-X for each quarter being corrected.

In 2026, e-filing matters because Form 941-X is now part of the employment-tax e-file world. The IRS employment e-file page says corrected employment tax returns, including Form 941-X, can be e-filed. If the software does not use an online signature PIN, the taxpayer may need to scan and attach Form 8453-EMP, the E-file Declaration for Employment Tax Returns. The current Form 8453-EMP covers Form 941-series returns and includes Form 941-X line references, so it belongs in the examination file when an amended employment return was filed electronically through an ERO or software provider.

Keep the filing evidence with the ERC support file: the original Form 941, the signed Form 941-X, proof of mailing or e-file acceptance, any Form 8453-EMP or Form 8879-EMP used by the provider, account transcripts if available, refund checks, deposit records, and correspondence. If a third-party payer, professional employer organization, certified PEO, or payroll service filed the return, the employer still needs a copy of the filed return and the workpapers. The IRS is examining the taxpayer's claim, not the promoter's sales deck.

A strong ERC file is quarter-specific. It does not say "COVID hurt revenue" and stop there. It shows which eligibility path applied to each quarter: a full or partial suspension due to a government order, a significant decline in gross receipts, or recovery startup business status for eligible 2021 quarters. The IRS ERC page points employers to the eligibility checklist and warning signs because those are the filters the agency has been using in review. If the claim was based on suspension, identify the exact order, the issuing government, the effective dates, the affected operations, and the more-than-nominal effect. If the claim was based on gross receipts, include the 2019 comparison quarter, the 2020 or 2021 tested quarter, accounting-method consistency, and any controlled-group aggregation analysis.

The wage file needs the same discipline. For each quarter, keep payroll registers, health-plan expense detail, full-time employee counts, related-party wage review, large-employer or small-employer classification, and the qualified-wage calculation. If the employer received Paycheck Protection Program forgiveness, Restaurant Revitalization Fund grants, Shuttered Venue Operators Grants, or other overlapping relief, keep the wage allocation schedule that prevents double use of the same wage dollar. The IRS warning-sign materials in 2024 specifically called out PPP wage overlap, family-member wages, large employers claiming wages for employees who provided services, and businesses unable to support how an order suspended operations.

The retention period should be longer than many employers first assumed. The 2026 Form 941-X instructions state that records related to qualified wages for the COVID-19 related employee retention credit paid after June 30, 2021, and before January 1, 2022, should be kept for at least seven years. That longer retention period fits the five-year ERC assessment window for the last two quarters of 2021 and the extended IRS compliance cycle that is still active in 2026.

ERC denials are not all the same. Some are timeliness denials. Some are eligibility denials. Some are partial disallowances after the IRS accepts only a portion of a quarter. Some are mathematical adjustments. Some are notices that a claim cannot be processed because it lacks necessary information. The practical response starts with classifying the letter and the affected quarter, not with sending a broad narrative.

For a Letter 105-C, the IRS Understanding Letter 105-C page explains that the letter is the legal notice that the ERC was denied as a refund or credit. The page says the employer generally should dispute the disallowance within 30 days to protect the administrative process, and it explains that the taxpayer may request Appeals review or file suit in the U.S. District Court with jurisdiction or the Court of Federal Claims. The same page also says a taxpayer who received Letter 105-C is not eligible for the claim withdrawal program for the tax periods covered by that letter.

That last point is important. Withdrawal is for claims that have not entered processing or refund checks that have not been cashed or deposited. Once Letter 105-C has arrived for a period, the path is no longer withdrawal for that period; it is agreement, reconsideration, Appeals, payment and cleanup, or refund litigation. Employers with multiple quarters may have different procedural choices for different quarters. One quarter might be disallowed, another still pending, and a third already paid and under examination.

A reconsideration package should be built like an administrative record. Put the IRS letter first. Add a one-page cover letter listing the taxpayer name, EIN, quarters, form numbers, dollar amounts, and requested action. Then add an issue matrix: for each quarter, state the eligibility theory, qualified wages claimed, credit claimed, documents attached, and where the relevant evidence appears. Do not bury the IRS in a 90-page PDF with no index. A good package lets an examiner or Appeals officer move from claim to proof without guessing.

For a suspension claim, attach the government order, not a news article about the order. If the order is long, include a short excerpt reference and the full order as an exhibit. Then explain the business component affected, the pre-order baseline, the operational restriction, and the numerical effect: hours closed, capacity reduction, service line shut down, supplier order cancellation tied to a governmental order, or other measurable facts. For gross receipts, attach quarter-by-quarter ledgers, tax return schedules, POS reports, bank reconciliations if useful, and an explanation of the accounting method used.

If the employer wants Appeals review, include the required protest or small-case request details, plus Form 2848 if a representative will communicate with the IRS. If the IRS keeps the disallowance after reviewing a response, the Letter 105-C page says it may issue Letter 3064-C requesting more information or Letter 916-C advising that the initial disallowance stands. That sequence should be tracked on a deadline calendar because refund-suit time keeps running.

A major 2026 procedural development is IR-2026-58. On April 27, 2026, the IRS announced a streamlined way for some taxpayers with ERC disallowance letters to request more time for administrative review or refund litigation. The release explains that taxpayers receiving Letter 105-C or 106-C generally have two years from the letter date to resolve the claim administratively or file a refund suit, and that an Appeals protest does not extend that statutory deadline by itself.

The new process uses Form 907, Agreement to Extend the Time to Bring Suit, if the taxpayer is waiting for IRS consideration of its response and has six months or less left before the two-year period expires. The IRS release says eligible taxpayers can use the Document Upload Tool route described in the notice procedure. For employers with 2024 disallowance letters, this is not a minor detail. The two-year window can expire while the administrative file is still moving, and after it expires the IRS cannot issue a refund even if it later agrees with the taxpayer.

Form 907 is not a substitute for evidence. It is a time-management tool. The employer still needs the reconsideration package, appeal request, and legal analysis. But in 2026, any ERC denial calendar should include three dates: the letter date, the two-year suit deadline, and the date six months before that deadline when the Form 907 streamlined process may become relevant.

Defending a claim makes sense when the file is specific, internally consistent, and tied to IRS guidance such as Notice 2021-20, Notice 2021-23, Notice 2021-49, and Notice 2021-65. It is usually worth defending a claim based on a clear gross-receipts decline with complete accounting records, or a suspension claim tied to a direct government order that materially restricted a more-than-nominal business component. The defense should still be disciplined: state the quarter, authority, facts, calculation, and requested correction.

Unwinding or conceding makes more sense when the employer cannot identify an order, claimed all available quarters because a promoter said "everyone qualifies," used PPP forgiveness wages, included family wages without analysis, or claimed a large-employer quarter for employees who kept providing services. For unpaid claims, the IRS withdrawal program may still be available if the claim has not been paid and has not reached disallowance for the period. For paid 2021 claims, the second ERC VDP closed on November 22, 2024, but its terms still show the IRS view: voluntary correction before examination was treated more favorably than waiting for enforcement.

Stopping is sometimes the right answer after a Letter 105-C if the evidence does not support the claim and the two-year litigation window would only create cost. But stopping does not mean ignoring the income-tax side. The IRS ERC page reminds employers that claiming ERC requires a wage deduction reduction for the same tax period. If ERC is disallowed after an income-tax return was amended or wage deductions were reduced, the employer may need to clean up income-tax returns under the IRS FAQ guidance.

• IRS ERC hub: Employee Retention Credit.
• IRS examination and denial posture: IR-2024-169, IR-2024-203, IR-2024-212, IR-2024-213, and IRS warning-sign guidance linked from the ERC hub.
• Forms and procedures: Form 941-X, employment tax e-file procedures, Form 8453-EMP, Understanding Letter 105-C, and IR-2026-58.
• Published guidance: Notice 2021-20, Notice 2021-23, Notice 2021-49, Notice 2021-65, and Announcement 2024-30 in IRB 2024-36.