October 2025 Outlook on the Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) was designed to help businesses that kept employees on payroll during the COVID-19 pandemic. However, years later, many companies are still waiting for their refunds due to IRS processing delays, fraud investigations, and changing rules. This update provides the latest information on where the program stands, what businesses should expect, and important steps to take moving forward.

Current Status of the Employee Retention Tax Credit (ERTC)

The IRS has been working through a large backlog of claims. As of October 2024, about 400,000 claims worth $10 billion were being processed. Many of these claims were filed during a time when aggressive marketing from third-party firms led to a flood of incorrect applications. Because of this, the IRS has been carefully reviewing each claim to ensure that only eligible businesses receive refunds.

For companies that have not received their ERTC funds yet, the IRS also offers a Claim Withdrawal Program, which allows businesses to withdraw their applications if they are unsure about their eligibility.

Processing Delays and Backlogs

While the IRS has made some progress, the backlog of ERTC claims is still a major issue. According to the National Taxpayer Advocate’s 2024 Annual Report to Congress, as of October 26, 2024, the IRS had about 1.2 million pending ERTC claims. Some of these claims have been waiting for over a year.

The main reasons for the slow processing include:

• The high number of incorrect or fraudulent claims that require extra review.
• The IRS’s effort to separate valid applications from ineligible ones.
• The lack of transparency for businesses trying to check their claim status.
• Confusing denial letters that leave business owners uncertain about their next steps.
• IRS audits of previously approved ERTC claims, further delaying refund payments.

The IRS Commissioner announced in December 2024 that 500,000 more claims are expected to be processed in 2025, but the exact timeline is still unknown.

IRS Actions and Legislative Developments

Fraud Investigations and Compliance Crackdowns

The IRS has ramped up audits and criminal investigations into fraud related to the ERTC. Many tax professionals warned that misleading marketing encouraged businesses to file for the credit even when they didn’t qualify. As a result, the IRS has been aggressively reviewing claims, rejecting improper applications, and pursuing legal action against those responsible for fraudulent filings.

New Rules for Third-Party Payers

The IRS introduced a consolidated claim process for businesses that used third-party payroll providers to file ERTC claims. This allows payroll companies to withdraw claims on behalf of some clients while keeping others in place. The goal is to speed up processing for legitimate applications and remove incorrect claims from the backlog more efficiently.

Congressional Concerns Over Delays

The National Taxpayer Advocate’s Report urged Congress to take action to improve the processing of ERTC claims. The report emphasized that many small businesses are struggling because they were counting on these refunds to cover payroll and other expenses. The report also criticized the IRS for:

• Lack of communication with businesses waiting for payments.
• Using audit-like procedures without standard taxpayer protections.
• Long delays in reissuing stolen refund checks for businesses that were victims of fraud.

While no major legislative changes have been announced, the IRS is under pressure to clear the backlog faster while ensuring only eligible businesses receive payments.

Guidance for Businesses Moving Forward

If your business has applied for the ERTC, here are some key steps to take:

1. Check Your Claim Status

The IRS has been working to provide clearer updates to businesses on the status of their claims. If you’ve been waiting for a long time, contact the IRS or a trusted tax professional to check if your claim is still active or needs additional documentation.

2. Review Your Eligibility

If you’re unsure whether your claim was valid, review the IRS’s ERTC Eligibility Checklist or consult with a tax expert. If you determine your business was not eligible, consider using the Voluntary Disclosure Program (VDP) to return the funds before audits begin.

3. Be Cautious of Third-Party Promoters

Many businesses were misled by aggressive marketing from firms that exaggerated who could qualify for the ERTC. The IRS is targeting these promoters, but if your business worked with one, you should double-check the accuracy of your claim to avoid issues later.

4. Prepare for Potential Audits

Even if you received an ERTC refund, your claim could still be reviewed by the IRS. Businesses should keep all documentation, payroll records, and proof of eligibility for at least five years in case of an audit.

5. Consider Withdrawing an Unpaid Claim

If your business filed an ERTC claim but hasn’t received payment yet, and you aren’t sure if it was valid, the IRS allows you to withdraw your claim to avoid future penalties or audits.

March 2025 Update: IRS Clarifies Wage Expense Rules for ERC

In March 2025, the IRS released updated guidance on how to handle wage expenses tied to the Employee Retention Credit (ERC).

If You Received the ERC but Didn’t Reduce Wage Expenses:
You don’t need to amend your prior tax return. Instead, include the ERC amount as income on your return for the year you received the refund to correct the overstated deduction.

If Your ERC Claim Was Denied but You Reduced Wage Expenses:
You can increase your wage expense on your current-year return to reverse the prior reduction. An amended return is not required.

These updates provide a simpler path for businesses to stay compliant without having to revise past returns. For more, see IRS Notice 2021-20 and news release IR-2022-89.

July 2025 Update: ERC Claims Cut Off and Penalties Expanded

Under the new tax law, any pending ERC claims submitted after January 31, 2024, for Q3 or Q4 of 2021 will no longer be accepted. The IRS now has up to six years to audit and recapture ERC claims. Additionally, stricter penalties have been introduced for ERC promoters who don’t meet due diligence standards or who are found to have supported fraudulent claims.

October 2025 Update: ERC Costs Soar Past $300B as IRS Eases Reporting Rules

Recent estimates from the Penn Wharton Budget Model suggest that the Employee Retention Credit (ERC) may ultimately cost the federal government $300+ billion — far above initial projections — largely because many payments were made retroactively, long after the pandemic period had passed. Penn Wharton Budget Model

Meanwhile, the IRS’s March 20, 2025 update to its ERC FAQs provides relief and clarity on how to handle wage deduction adjustments. Notably, if you claimed the ERC but did not reduce your wage expense in the original tax year, you are not required to file amended prior-year returns. Instead, the IRS now allows including that “overstated” deduction as gross income in the year you receive the ERC refund.

This development is significant: it reduces the burden on businesses with closed tax years and helps avoid reopening past returns, while still maintaining consistency with the tax benefit rule.

Conclusion

The Employee Retention Tax Credit was designed to provide crucial financial relief for businesses impacted by the pandemic. Despite the IRS making significant strides in processing claims, many businesses continue to face delays, partly due to increased fraud investigations and evolving compliance requirements. 

At TaxTaker, we've successfully assisted our clients in reclaiming hundreds of thousands of dollars in due funds. Our ongoing efforts include actively supporting those still awaiting their claims, ensuring every business we work with maximizes their entitled benefits. If you're navigating these challenges, reach out to us at TaxTaker for expert assistance in securing your tax credits efficiently.

For businesses that are still waiting for payments, it’s important to stay updated, review eligibility, and be prepared for possible audits.

President Trump's current nominee for IRS Commissioner, Billy Long, has extensive experience in the ERTC when it was first introduced. It is expected that outstanding claims will be fast tracked if he is confirmed. As of the writing of this article, there has not been a confirmation hearing scheduled.

While the outlook for ERTC refunds is improving, businesses should remain cautious and proactive as the IRS continues to process claims and investigate improper applications.

Sources

Internal Revenue Service. (2024). IRS accelerates work on Employee Retention Credit claims; agency currently processing 400,000 claims worth about $10 billion. Retrieved from [https://www.irs.gov/newsroom/irs-accelerates-work-on-employee-retention-credit-claims-agency-currently-processing-400000-claims-worth-about-10-billion]

National Taxpayer Advocate. (2025). National Taxpayer Advocate delivers Annual Report to Congress; flags Employee Retention Credit, Identity Theft Victim Assistance processing delays and calls for adequate funding to improve taxpayer services. Retrieved from [https://www.irs.gov/newsroom/national-taxpayer-advocate-delivers-annual-report-to-congress-flags-erc-identity-theft-victim-assistance-processing-delays-and-calls-for-adequate-funding-to-improve-taxpayer-services]

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