If you ran a small business through the pandemic and a third-party promoter told you that you were sitting on tens of thousands of dollars in "free money" from the Employee Retention Credit, you have plenty of company — and you may also have a problem. The IRS has identified more than a million ERC claims with potential compliance issues, has mailed out tens of thousands of recapture letters since 2024, and has been granted a six-year statute of limitations to keep auditing 2021 claims through 2027. The closing of the second Voluntary Disclosure Program in late 2024 did not close the door on cleaning things up; it just narrowed the doorway.
This guide explains what the second ERC Voluntary Disclosure Program offered, why it ended, and — more importantly — what options small businesses still have in 2026 if they suspect a previously filed ERC claim was overstated, wrong, or based on bad advice. The goal is to help you size up your exposure, choose a remedy before an examiner picks one for you, and keep your records in shape for the long audit window ahead.
A Quick Recap of How We Got Here
The Employee Retention Credit was a payroll tax credit Congress created in 2020 and expanded in 2021 to encourage employers to keep employees on the books during pandemic disruptions. For some businesses, it was a legitimate lifeline. For many others, it became something else entirely: a target of aggressive marketing campaigns from "credit mills" promising six-figure refunds in exchange for contingency fees of 15% to 25% of the claim.
By 2023, the IRS had paused processing of new ERC claims and warned employers about misleading promotions. Internal reviews flagged that a majority of late-filed claims showed signs of being improper. In response, the agency rolled out two limited-time clean-up programs designed to give honest employers a graceful exit.
The first Voluntary Disclosure Program
The original program ran from late 2023 through March 22, 2024. It covered 2020 and 2021 quarters and let participating employers repay just 80% of the ERC they had received. No interest, no penalties, no requirement to amend income tax returns to undo the wage-expense reduction.
The second Voluntary Disclosure Program (the "2.0")
The IRS reopened the door from August 15, 2024 through November 22, 2024. The terms were tighter:
- Eligibility was limited to 2021 quarters only (no 2020 relief in this round)
- Repayment increased to 85% of the ERC received (versus 80% the first time)
- Promoter information had to be disclosed
- The applicant had to file Form 15434 through the IRS Document Upload Tool
Even at 85%, the math was attractive. Participants kept 15% of the refund tax-free, avoided interest, dodged the new 20% accuracy-related penalty for erroneous ERC refunds, and skipped the cost of amending income tax returns to back out the corresponding wage-expense reduction. Several thousand employers took the deal.
The program closed on November 22, 2024, and the IRS has not signaled plans to reopen it. So if you missed the window, your menu of options changed — but it did not disappear.
What Still Works in 2026
Three remedies remain available to employers who want to make a wrong ERC claim right. Picking the correct one depends on the current status of your claim.
Option 1: Withdraw the claim (if it has not been paid yet)
The ERC Claim Withdrawal process is still open with no announced deadline. It is the cleanest option, but only certain claims qualify. You can withdraw if:
- You made the claim on an adjusted employment tax return (Form 941-X, 943-X, 944-X, or CT-1X)
- That return was filed only to claim the ERC, with no other adjustments
- You want to withdraw the entire ERC claim, not just a portion
- The IRS has not paid the claim, or the IRS paid the claim by check but you have not cashed or deposited it
Withdrawn claims are treated as if they were never filed. There is no penalty, no interest, no income tax amendment, and no money to repay. You fax the marked-up 941-X to the IRS at 855-738-7609, hold on to the confirmation, and wait for an acceptance letter.
Withdrawal is essentially the cheapest possible exit, which is why eligibility is so narrow: it only protects you while the IRS has not yet paid out cash.
Option 2: Amend the return (if the claim has been paid)
If the ERC refund has already landed in your bank account, you cannot withdraw the claim. You can, however, file a corrected Form 941-X to reduce or eliminate the previously claimed credit. This is sometimes called a "voluntary correction" or "self-correction."
This approach requires you to:
- File a Form 941-X for each quarter, reversing the ERC amount you should not have claimed
- Repay the ERC, plus interest from the date the IRS paid you
- Amend your federal income tax return for the year the ERC was claimed to add the wage-expense reduction back into income (the ERC is non-taxable, but it reduces deductible wages by the same amount)
- Pay any resulting income tax, interest, and potential accuracy-related penalty
Compared to the Voluntary Disclosure Program, the self-amendment path is more expensive. You repay the full 100% of the ERC instead of 85%, you owe interest, and you have to redo the wage-expense math on your income tax return. The advantage is that it is available indefinitely (subject to the statute of limitations) and is preferable to waiting for an audit letter.
Option 3: Respond to an IRS notice
If you receive a letter from the IRS, your options narrow further. The most common letters are:
- Letter 6612 — an examination opening notice that requests documentation supporting the ERC claim
- Letter 105-C / 106-C — full or partial disallowance of an unpaid claim
- Letter 6577-C — a recapture letter for an ERC that was already paid, demanding the money back
The IRS announced in 2024 that it would issue up to 30,000 Letter 6577-C recapture notices, targeting more than $1 billion in improper ERC payments. Tens of thousands more letters have continued to roll out. If one of these arrives, your remedy is no longer a voluntary disclosure — it is a response within the deadline printed on the letter (usually 30 days). At that point, your task is to either prove eligibility with contemporaneous records or negotiate the assessment.
Failing to respond converts the proposed adjustment into an assessed liability, and the IRS can begin collection action with levies and liens.
Understanding the Six-Year Audit Window
One reason this issue is not going away is that Congress gave the IRS an unusually long runway. For Q3 and Q4 2021 ERC claims, the statute of limitations was extended from three years to six years from the later of the claim date or the original return due date. In practical terms:
- 2020 ERC quarters: the assessment window largely closed in April 2024
- Q1 and Q2 2021 ERC: closes April 15, 2025
- Q3 and Q4 2021 ERC: closes April 15, 2027
The agency has another tool in its back pocket: erroneous refund suits. The IRS can file a federal lawsuit to claw back a paid refund within two years of the refund date (five years if fraud is alleged). That window is independent of the assessment statute and applies regardless of whether the underlying audit period has closed.
The takeaway is that "the statute ran" is unlikely to be a useful defense for most 2021 ERC claims for the next year and a half.
The 20% Penalty for Improper ERC Claims
Recent legislation introduced a 20% accuracy-related penalty specifically targeted at erroneous ERC refunds. The penalty applies to the amount of the improper refund and is in addition to the repayment of the credit itself and interest charges. In serious cases — particularly when fraud or willful disregard is alleged — penalties can climb to 75% under the civil fraud statute, with criminal exposure on top of that for the worst actors.
This is why the Voluntary Disclosure Program was such a good deal: it neutralized the 20% penalty entirely. Outside of the program, the penalty is in play for any claim the IRS adjusts.
What an "Improper Claim" Actually Looks Like
If you are wondering whether your claim is at risk, look back at the eligibility theory your promoter used. The IRS has publicly flagged several patterns it considers high-risk:
- Generic OSHA or supply-chain claims. Asserting a "partial suspension of operations" because of vague OSHA guidance or supplier delays, with no specific government order tied to your jurisdiction or industry, is a top audit trigger.
- Period-long suspensions for the entire year. Many promoters claimed all four quarters of 2021 even though most government orders had eased by Q3 or Q4.
- Including non-eligible wages. Wages paid to majority owners and their relatives generally do not count, and wages used for PPP forgiveness cannot be double-counted for ERC.
- Misclassifying the business size. The credit calculation differs sharply for "small" versus "large" employers (the threshold is 100 or 500 average full-time employees, depending on the year). Promoters sometimes ignored or misapplied this rule.
- Aggregation failures. Related entities under common control must be aggregated for eligibility tests. Splitting them apart inflates claims.
- Contingency-fee documentation. A promoter file containing only a generic eligibility memo with the business name filled in is a red flag and unlikely to satisfy an examiner.
If any of these patterns match your facts, request a second opinion from a CPA or tax attorney who was not involved in the original claim before you decide whether to amend, withdraw, or wait.
A Decision Framework for 2026
The right move depends on three quick questions.
1. Has the IRS already paid the ERC?
- No, and you have not cashed any check: withdrawal is almost always the best path.
- Yes: skip to question 2.
2. Has the IRS sent you an audit, disallowance, or recapture letter?
- No: you can still self-amend with a corrective Form 941-X. Expect to pay the full credit back plus interest, plus the income tax effect of restoring the wage deduction.
- Yes: respond by the deadline. Bring in a tax professional immediately if the claim was large or the eligibility theory is shaky.
3. Was the original claim filed by a contingency-fee promoter using a boilerplate eligibility theory?
- If yes, treat your exposure as high. The IRS specifically prioritizes these claims, the audit window is open through 2027 for most 2021 quarters, and waiting passively rarely improves the outcome.
How Good Records Change Your Outcome
Whether you are amending a return, withdrawing a claim, or defending an audit, the single biggest predictor of how the case ends is the quality of your contemporaneous documentation. The IRS is not asking auditors to take your word for the eligibility theory — they want specific government orders cited, payroll registers showing eligible wages by quarter, owner and family-member exclusions, PPP forgiveness reconciliations, and revenue tests for the gross-receipts theory.
If your bookkeeping was disorganized in 2020 and 2021 — and let's be honest, many small businesses were running on adrenaline and spreadsheets in those years — now is the time to rebuild the record. That means:
- Reconstructing payroll detail by quarter, with each employee's eligible wage cap correctly applied
- Documenting which government orders affected your operations and during which periods
- Reconciling PPP forgiveness against any wages used for ERC
- Preparing a gross-receipts comparison for any quarter you claimed under that test
- Keeping copies of promoter correspondence, eligibility memos, and contracts (these become part of your defense, and sometimes part of an IRS referral against the promoter)
Many small employers discover during this exercise that the records they need have been scattered across email attachments, a former bookkeeper's laptop, and a folder labeled "2021 misc." That sprawl is a recurring problem with proprietary cloud accounting tools: when access ends, so does easy retrieval.
Keep Your Financial Records Audit-Ready
The ERC story is a reminder that tax events do not stay closed forever — six-year audit windows, recapture letters, and clawback suits can land long after a refund check has been deposited. The businesses that come through these reviews quickly are the ones whose payroll, revenue, and wage records can be reproduced on demand. Beancount.io provides plain-text, version-controlled accounting that you own forever, with no vendor lock-in and a complete audit trail you can hand to a tax professional in seconds. Get started for free and see why developers and finance professionals are switching to plain-text accounting to keep their records defensible for the long haul.