Employee Retention Credit Update 2026: Pending Refunds, New Compliance Rules, and What to Do Next

If your business filed an Employee Retention Credit claim and is still waiting on a refund, you are not alone. As of mid-2025, the IRS had processed nearly 5 million ERC claims and paid out roughly $235 billion—but a substantial backlog of unresolved claims, audits, and appeals carried straight into 2026. Add in sweeping legislative changes from the One, Big, Beautiful Bill, and the ERC landscape looks very different from the program small businesses signed up for during the pandemic.

This guide walks through where the program stands in 2026, why so many refunds are still pending, what the new compliance rules mean, and the concrete steps you can take if you are still waiting—or worried about an audit.

What the Employee Retention Credit Was Designed to Do

The Employee Retention Credit was created by the CARES Act in March 2020 to help businesses keep employees on payroll during pandemic-era shutdowns and revenue declines. At its peak, an eligible employer could claim up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for the first three quarters of 2021—a credit that, for many small employers, added up to tens or even hundreds of thousands of dollars.

To claim the credit, businesses filed an amended payroll tax return on Form 941-X for the eligible quarters. Because the program was retroactive and the qualification rules were complex, the IRS received a flood of late claims, many of them encouraged by aggressive third-party "ERC mills" that promoted the credit to businesses that did not actually qualify.

By late 2023, the agency had a backlog of more than 1.2 million pending ERC claims and growing concerns that billions of dollars in improper or fraudulent claims had been paid or were waiting to be paid.

The Backlog That Carried Into 2026

To slow the inflow of questionable claims, the IRS imposed a moratorium on new ERC processing in September 2023. It later resumed processing claims filed before September 14, 2023, and eventually expanded that to claims received before January 31, 2024.

The Taxpayer Advocate Service reported no significant progress on the ERC backlog during the first quarter of fiscal year 2026, citing reduced staffing capacity and operational impacts from a lapse in appropriations. According to IRS officials, most outstanding claims were closed by December 31, 2025—meaning a high share of remaining cases now sit in audit, appeal, or active litigation rather than ordinary processing queues.

Translation for affected businesses: if your refund has not arrived yet, it is likely because your claim is being scrutinized, not because it is sitting unread in a stack of paper.

How the One, Big, Beautiful Bill Changed the Rules

The most consequential ERC development of the past year came from the One, Big, Beautiful Bill Act (OBBB), enacted on July 4, 2025. The law fundamentally restructured how late ERC claims are treated and gave the IRS sharper enforcement tools.

A Hard Filing Cutoff for 2021 Q3 and Q4 Claims

Section 70605(d) of the OBBB blocks the IRS from allowing or refunding ERC claims for the third and fourth quarters of 2021 if those claims were filed after January 31, 2024. This applies even if the underlying business was otherwise eligible. There is one important carve-out: if a late-filed claim was already refunded or credited before July 4, 2025, the new rule does not claw it back.

In plain terms, January 31, 2024 became a hard wall for new 2021 Q3/Q4 claims. After that date, late filers cannot get the money—period.

Six-Year Statute of Limitations on Audits

The OBBB extends the IRS's audit window for ERC claims to six years. That is significantly longer than the standard three-year statute of limitations for most payroll tax matters. Practically, this means a business that received an ERC refund in 2023 can still be audited well into the late 2020s.

Promoter Penalties and Due Diligence Requirements

The bill imposes new penalties on ERC promoters who failed to meet basic due diligence standards when preparing claims. The intent is to deter the kind of mass-marketed, eligibility-blind claim filing that fueled much of the fraud in the program.

Appeal Rights for Improper Disallowances

If you believe your claim was timely filed on or before January 31, 2024, and was nevertheless disallowed under section 70605(d), you can appeal through the IRS Independent Office of Appeals. The IRS published Fact Sheet FS-2025-07 with FAQs that address common scenarios and the documentation needed to support your position.

Why Your Refund Is Still Pending

If you are still waiting on an ERC refund in 2026, your claim is probably in one of these four buckets:

1. Active processing. A small share of pre-deadline claims remain in standard review. The IRS has long said it targets a 10-month processing window, but real-world waits of 16 months or more are common.
2. Examination or audit. Higher-risk claims—those flagged by IRS algorithms based on industry, claim size, or filing patterns—are pulled into examination. Expect document requests for payroll records, government order documentation, and gross receipts comparisons.
3. Pending appeals. If your claim was disallowed, you may have filed a protest. Appeals cases take months to assign and resolve.
4. Litigation. A growing number of disputes have moved to U.S. Tax Court or refund suits in U.S. District Court, particularly where appeals reached an impasse.

There is no public dashboard for ERC claims. The IRS's "Where's My Amended Return?" and "Where's My Refund?" tools do not cover Form 941-X filings. Practically, that leaves you with two reliable status sources: phone calls and IRS account transcripts.

How to Check Your ERC Refund Status

Most businesses get the clearest picture by combining a transcript review with a call to the IRS Business and Specialty Tax Line.

Pull Your Form 941 Transcript

You can request a Form 941 wage and income transcript through the IRS Business Tax Account or by submitting Form 4506-T. The transcript shows whether the IRS has logged your amended return, whether any adjustments were made, and whether a refund or credit posted to your account.

Call the IRS Directly

The IRS Business and Specialty Tax Line at 800-829-4933 remains the primary status channel for ERC claims. Call early in the morning, have your EIN and the specific quarters claimed ready, and ask for the current status of each Form 941-X. If a third party filed your claim on your behalf, you still need to call yourself or grant them a power of attorney via Form 2848.

Review IRS Correspondence Carefully

If the IRS has questions or has proposed disallowing part of your claim, you will receive notices such as Letter 6577-C (initial review notification), Letter 105-C (claim disallowance), or an examination notice. Each notice has a response deadline. Missing one can forfeit your appeal rights.

Two Programs to Fix a Bad Claim

If you suspect your ERC claim was overstated or never qualified—often because a promoter pushed you into it—the IRS has offered two correction paths during the cleanup phase.

The Special Withdrawal Program

For claims that have been filed but not yet paid, the Withdrawal Program lets you ask the IRS to treat your Form 941-X as if it had never been submitted. Approved withdrawals are not subject to the 20% penalty, and interest does not accrue on amounts you never received. Withdrawal is generally the best route if you have not yet been paid and are unsure about eligibility.

The Voluntary Disclosure Program

The original Voluntary Disclosure Program closed November 22, 2024. It allowed recipients of improper payments to repay 80% of the credit and avoid penalties and interest. A narrower second-round program ran into 2024 with less generous terms. As of 2026, the disclosure window has effectively closed, but penalty abatement and reasonable cause arguments remain available case-by-case if you can document good-faith reliance on a tax professional and prompt corrective action.

What to Do If You Are Audited

ERC examinations are document-heavy. Auditors are testing two things: whether the business was actually eligible, and whether the wages claimed were calculated correctly.

Be prepared to produce:

• Eligibility documentation. Either a full or partial suspension order from a federal, state, or local government authority, or quarterly gross receipts schedules showing a significant decline relative to the same quarter in 2019.
• Payroll records. Detailed payroll registers, Forms W-2, and quarterly Form 941 filings for the eligibility periods.
• Wage allocation worksheets. A reconciliation that excludes wages used for the Paycheck Protection Program (PPP) loan forgiveness, Families First Coronavirus Response Act (FFCRA) credits, or other COVID-era credits. Double-counting is one of the most common audit findings.
• Owner and family-member exclusions. Wages paid to majority owners and certain family members generally do not qualify and must be excluded.
• Aggregation rules. If you operate multiple entities under common control, the IRS will want to see how you applied the aggregation rules in determining a "significant decline" in gross receipts.

If the auditor proposes a disallowance, you typically have 30 days to request an appeals conference before the disallowance becomes final. Engaging a CPA or tax attorney experienced in ERC examinations is usually worthwhile given the dollar amounts involved.

Accounting and Bookkeeping Considerations

ERC refunds, repayments, and adjustments touch your books in ways that are easy to mishandle. A few principles to keep your records clean:

• Recognize the credit in the right year. Under the IRS guidance, a refundable employment tax credit reduces wage expense in the year the wages were paid, not the year the cash was received. If you claimed the ERC retroactively for 2020 or 2021 wages, you generally need to amend those years' income tax returns to reduce the wage deduction—even if the cash refund only arrived in 2024 or later.
• Track interest separately. Interest the IRS pays on a delayed refund is taxable income in the year you receive it. Record it as interest income, not as part of the credit.
• Document the claim file forever. Given the new six-year audit window, do not purge ERC documentation on your normal retention schedule. Keep eligibility analyses, calculation worksheets, and any correspondence with promoters or tax advisers indefinitely.
• Reserve for potential clawbacks. If you have meaningful uncertainty about your claim's accuracy, talk to your CPA about whether to record a reserve under the relevant accounting standards. Auditors and lenders increasingly ask about ERC contingencies during financial reviews.

Accurate, well-organized financial records are the difference between a smooth ERC audit and a months-long nightmare. Plain-text accounting systems make this kind of multi-year reconstruction much easier because every entry is human-readable and version-controlled.

A Practical Checklist for 2026

Whether your claim is paid, pending, or under review, take these steps before the next quarter ends:

1. Locate every Form 941-X you filed. Confirm the quarters, the credit amounts claimed, and the date of filing.
2. Pull current Form 941 transcripts. Check whether refunds, adjustments, or examination indicators have posted.
3. Reconcile to your income tax returns. Confirm you amended the corresponding income tax year to reduce wage expense.
4. Verify your wage allocations. Make sure no wages were double-counted across ERC, PPP forgiveness, and FFCRA credits.
5. Review owner and family-member wages. Exclude any that do not qualify under the related-party rules.
6. Audit-proof your documentation file. Eligibility orders, gross-receipts comparisons, and payroll records should be organized by quarter and easy to retrieve.
7. Track every IRS notice. Calendar response deadlines and confirm receipts in writing.
8. Talk to a qualified tax professional, not the promoter who originally pushed the claim, if you have any doubts about eligibility.

Common Mistakes That Trigger ERC Disputes

The most frequent issues that lead to disallowance or refund delays are usually preventable:

• Claiming a "full or partial suspension" with no qualifying government order. General supply-chain disruption or revenue softness does not count.
• Ignoring the 80% gross-receipts test for 2021 quarters. The 2020 threshold was a 50% decline; the 2021 threshold tightened to a more-than-20% decline (i.e., gross receipts at less than 80% of the same 2019 quarter).
• Including PPP-forgiven wages. The same wages cannot generate both PPP loan forgiveness and an ERC.
• Failing to amend the income tax return. If you got the ERC, you must reduce your wage deduction for that year. Skipping this step creates a discrepancy the IRS will eventually catch.
• Trusting promoter calculations without independent review. Many ERC mills used aggressive interpretations that have not held up under examination.

Keep Your Financial Records Audit-Ready

The Employee Retention Credit story is a reminder of how long-tail tax events can be. A claim filed in 2022 may still be under examination in 2026, and under the new six-year statute of limitations, audits stretching into the late 2020s are realistic. The businesses that handle these audits best are the ones whose financial records are clear, complete, and easy to reconstruct quarters or years later.

Beancount.io provides plain-text accounting that gives you complete transparency and version control over your financial data—no black boxes, no vendor lock-in, and every entry readable in any text editor a decade from now. If you are rebuilding documentation for an ERC audit, reconciling refund payments and interest income, or just want a system that makes multi-year tax positions easier to defend, get started for free and see why developers and finance professionals are switching to plain-text accounting. For a deeper look at how reports and dashboards work, browse the Fava interface or the documentation.