ERC Fraud Warning 2025: How to Avoid the IRS Audit Blitz

The Employee Retention Credit (ERC) was a financial lifeline for many businesses during the pandemic, offering much-needed payroll relief. However, as claims ballooned, often aided by aggressive third-party promoters, the IRS has initiated a major ERC fraud crackdown in 2025. 

Businesses that improperly claimed this refundable tax credit are now under heightened scrutiny. From audits to penalties for tax fraud, the consequences are real and mounting. 

Let’s delve deeper to understand what’s happening, why it matters, and how your business can safeguard itself. 

Why the IRS is intensifying ERC enforcement in 2025 

In the IRS’s own words, the ERC program has been “a magnet for fraud.” Here's why: 

• Billions in credits were claimed under questionable circumstances. 

• Many businesses were told they qualified even when they didn’t. 

• Promoters often charged high contingency fees (sometimes 15–30% of the refund). 

The IRS crackdown in 2025 is a direct response to this surge. Numerous audits have been initiated in early 2025 alone, with criminal investigations on the rise. 

What the IRS is doing about it 

• Deploying additional agents and AI-powered systems to detect patterns of ERC fraud. 

• Releasing updated guidance and public warnings to educate businesses. 

• Launching a voluntary disclosure program and allowing withdrawal of improper claims. 

• Partnering with tax professionals to educate and inform business owners about compliance risks. 

Red flags that trigger an ERC audit 

While the IRS is auditing thousands of ERC claims in 2025, certain types of businesses and filing behaviors are far more likely to come under scrutiny.  

Businesses most at risk include: 

• Those that worked with ERC mills or non-CPA consultants 

• Companies that claimed ERC without clear evidence of eligibility 

• Small businesses claiming disproportionately large credits 

• Businesses that filed late amended returns with minimal documentation 

• Employers that had no actual government-mandated shutdown 

Common audit triggers 

1. Third-party preparer involvement: Claims submitted by ERC mills or pop-up consultants. 

2. High refund amounts: Unusually large ERC claims in proportion to wages reported. 

3. Inadequate documentation: No proof of revenue decline, government mandates, or payroll records. 

4. Inconsistent payroll filings: Discrepancies between Form 941 and Form 941-X filings. 

5. Questionable eligibility periods: Claims made for time periods where the business was fully operational. 

If any of these apply to your business, expect the possibility of an employee retention credit audit or IRS correspondence in the coming months. 

What happens during an ERC audit? 

Step 1: Initial contact 

You’ll receive a notice, typically Letter 6612 or an Information Document Request (IDR). 

Step 2: IRS requests documentation 

This includes: 

• Proof of gross receipts decline 

• Payroll records (Forms 941 and 941-X) 

• Evidence of government shutdown orders 

• Internal communications or policies tied to operational disruption 

Step 3: IRS determination 

After reviewing documents, the IRS will either: 

• Uphold your claim 

• Propose a partial disallowance 

• Fully disallow the credit and assess repayment with penalties 

Step 4: Appeals (if necessary) 

You have the right to dispute the audit outcome through a formal appeals process. Having a reliable CPA firm or tax attorney at this stage is essential. 

Understanding ERC compliance for business owners 

Ensuring ERC compliance means maintaining documentation and clearly understanding eligibility criteria. Many businesses failed here by relying too heavily on third-party advisors. 

1. Documentation requirements 

To stay protected, retain: 

• Financial statements showing gross receipts by quarter 

• Government shutdown orders with specific dates and impact scope 

• Payroll records: Wages paid, PPP loan interactions, and employment tax filings 

• Communications with ERC advisors or tax consultants 

Keeping organized files for each quarter claimed is crucial in an audit. 

2. Be Cautious with third-party promoters 

• Avoid firms that guarantee eligibility without reviewing your financials. 

• Watch out for high contingency fees (15–30%); this is a red flag for aggressive claims. 

• Ensure your advisor signs the return or provides a signed written opinion of eligibility. 

3. Conduct a voluntary review (if needed) 

• If you're unsure whether your ERC claim was valid, consult a qualified tax professional. 

• The IRS is offering limited-time settlement programs and withdrawal options for businesses that self-correct. 

• Acting early can minimize penalties and protect your reputation. 

 ERC compliance quick checklist (2025 edition) 

• Reviewed ERC eligibility against IRS criteria 

• Collected and archived all supporting documents 

• Avoided percentage-based ERC consultants 

• Filed Forms 941 and 941-X accurately 

• Prepared for potential audit communication 

• Reviewed claim with a licensed tax professional 

• Considered voluntary disclosure if applicable

How to fix an incorrect ERC claim 

If you suspect your business may have claimed the ERC in error, it’s not too late to act proactively. Here’s how you can fix it: - 

A. Use the IRS voluntary disclosure program (2025) 

This program is for businesses that already received ERC funds but have since realized they were not eligible. 

Steps to take: 

• Review your eligibility thoroughly with a qualified tax advisor or CPA. 

• Apply for the voluntary disclosure program through the IRS website or your tax professional. 

• Repay 80% of the ERC amount received (you can keep 20%). 

• Provide supporting documentation showing why you believe the claim was in error. 

• Meet the deadline – The IRS has stated this program will close later in 2025, so time is critical. 

B. Withdrawing an unprocessed claim 

If your ERC claim has not yet been processed or paid out, you can formally withdraw it to avoid audits or penalties. 

Steps to take: 

• Identify the claim you want to withdraw (usually filed on Form 941-X). 

• Draft a written withdrawal request, including: 

1. Your business name and EIN 

2. The specific tax periods involved 

3. A clear statement requesting withdrawal of the ERC claim 

4. A signed acknowledgment that the business is no longer eligible 

• Attach the written request to a copy of Form 941-X and send it to the IRS office where the original claim was filed. 

Tip: Keep copies of all submissions and proof of delivery for your records. 

 Conclusion 

The IRS crackdown on ERC fraud in 2025 isn’t just aimed at intentional misuse; it’s also sweeping up businesses that made honest errors. With billions at stake, the IRS is aggressively auditing and penalizing improper claims using advanced data analytics and enforcement tools. 

This surge in enforcement is more than just a cautionary tale, it’s a clear ERC tax fraud warning for businesses that haven’t taken a second look at their filings. 

As a business owner, your strongest defence is a proactive approach:    

• Reassess your ERC eligibility 

• Organize and retain clear documentation 

• Consult trusted professionals before it's too late 

If your claims are solid; excellent. If there’s even a hint of uncertainty, act now to correct course. 

ERC compliance isn’t optional anymore; it’s essential to safeguarding your business, your reputation, and your future. 

 Unsure about your ERC claim? 

Don’t leave compliance to chance. Smart Accountants is here to guide you through audits, corrections, and proper filings every step of the way. 

Let’s review your ERC claim together, get in touch today.