The IRS Just Named ERC Mills a Problem: Why Your Refund May Become a Liability

Key takeaways

• IRS IR-2022-183 (October 19, 2022) warned employers about third-party promoters making "too good to be true" ERC claims and charging contingency fees based on the refund amount.
• The ERC is a legitimate credit — but eligibility is legally specific. Claiming it without meeting the statutory requirements creates a repayment obligation with interest and potential penalties.
• Promoter advice does not establish reasonable cause for penalty relief. The taxpayer who signed the payroll tax return bears the liability.
• The October 2022 warning is a signal that IRS examination of ERC claims is coming. The defensible posture is to review every claim for compliance before an examiner does it.

What the IRS said and why it matters

IRS Information Release 2022-183 described an increasing pattern of aggressive marketing by third parties claiming to quickly determine — often without substantive analysis — that a business qualifies for the Employee Retention Credit. The IR identified specific red flags:

• Firms promising large credits without gathering details about the employer's specific facts
• Charging contingency fees tied to the size of the refund
• Preparing claims for businesses with activity that clearly does not meet either eligibility test
• Providing no written opinion on the legal basis for the credit

The IRS characterized this pattern as a problem — not merely a compliance concern — and indicated that promoter schemes are among the factors driving improper claims that will require examination.

The two eligibility paths and why they require analysis

The ERC under IRC § 3134 (and its predecessor § 2301) is available to eligible employers through two paths. Both require careful application of facts to the statutory standard.

Path 1: Significant decline in gross receipts. The employer must demonstrate a specified percentage decline in gross receipts in a calendar quarter compared to the corresponding 2019 quarter. For 2021, the threshold is a 20% decline. The gross-receipts test is arithmetic — but it requires accurate quarterly revenue figures and correct comparison periods.

Path 2: Full or partial suspension of operations due to a governmental order. This path has generated the most aggressive promotion because it does not require a revenue decline. But it is also legally demanding. The suspension must result from an order of an appropriate governmental authority, must limit commerce, travel, or group meetings, and must more than nominally affect the employer's operations. A general statement that businesses in a region were impacted is not a governmental order. A governmental order that affected an industry but that the specific employer could fully accommodate through remote work or other means may not create a qualifying suspension.

The critical point is that both paths require employer-specific factual analysis. A promoter who claims to have determined eligibility in a brief conversation, without reviewing specific revenue data and operational records, has not performed that analysis.

The liability mechanics

An improperly claimed ERC is a failure to deposit employment taxes — because the credit is claimed by reducing the employer's payroll tax deposits. The IRS can assess the unpaid taxes, plus interest from the original due date, plus accuracy-related or fraud penalties depending on the nature of the misstatement.

The promoter who advised the claim does not bear that liability. The employer who signed Form 941 does. A claim that the employer relied on the promoter's advice may support a reasonable-cause defense, but only if the employer can demonstrate it provided the advisor with complete and accurate facts and that the advisor provided substantive legal analysis — not merely an assurance that the credit was available.

What businesses that have already filed should do

Pull the supporting documentation. For every quarter in which an ERC claim was made, identify the specific eligibility basis — gross receipts decline or governmental-order suspension. Locate the quarterly revenue figures, the specific governmental order if applicable, and documentation of how operations were affected.

Evaluate the claim against the statutory standard. The review should be done by someone applying the legal standard to the facts, not by someone re-affirming the original promoter's conclusion. If the original claim was prepared by a contingency-fee promoter with minimal factual engagement, independent analysis is warranted.

Identify exposure before the IRS does. The IRS has made clear that ERC examination is a priority. An employer who identifies a problematic claim and addresses it before examination — including through voluntary payment or amended return — is in a fundamentally different position than one who is discovered in examination. The options available before exam are broader, and the penalty exposure is typically lower.

Bottom line

A refund that was improperly claimed is a liability waiting to be collected. The IRS's October warning is not the beginning of enforcement attention to ERC claims — it is a signal that enforcement attention is already present and accelerating. The time to review claims is now.