What Is the IRS's Focus on ERC Claims in 2026 and How Should Businesses Respond?

1. The ERC Era Isn't Over. It's Entering a New Phase.

Many businesses believed their ERC journey ended when they filed their claim and received a refund. In reality, 2026 marks a different chapter of the program.

The IRS has shifted its attention from processing large volumes of claims to reviewing whether those claims were valid in the first place. Thousands of claims remain under review, audit, appeal, or additional examination, reflecting the agency's ongoing effort to separate well-supported claims from those based on weak or inaccurate eligibility positions.

This transition creates a new challenge for business owners.

Several years have passed since many claims were filed. Supporting records may be difficult to locate, key decision-makers may have left the organization, and businesses that relied heavily on third-party ERC consultants may not fully understand the assumptions behind their claim.

As a result, the key question in 2026 is no longer:

"Did we qualify for the ERC?"

It's now:

"Can we substantiate our claim if the IRS asks us to?"

2. Why ERC Claims Remain a Major IRS Priority

The ERC was one of the most valuable pandemic-era relief programs available to employers. It also became one of the most complex. Businesses looking for a refresher on the credit's original rules and eligibility criteria can review the official Employee Retention Credit guidance.

Eligibility often depended on detailed interpretations of government orders, revenue declines, payroll records, employee counts, and interactions with PPP funding. As businesses rushed to secure relief, many claims were prepared using different methodologies and varying levels of due diligence.

Today, the IRS is focused on determining whether those claims were supported by the facts.

Three factors continue to drive scrutiny:

Complex Eligibility Requirements

ERC qualification was rarely straightforward. Even businesses within the same industry could reach different eligibility conclusions based on their specific circumstances.

Aggressive Claim Promotion

Many organizations were approached by firms promoting broad qualification theories that may not align with current enforcement expectations.

Larger Financial Exposure

The size of many ERC refunds naturally increases the importance of verification. Larger claims generally receive greater attention because the financial risk to both the taxpayer and the government is higher.

For businesses, this means ERC compliance is no longer just a tax issue. It is now a recordkeeping, risk management, and documentation issue as well.

3. The Five ERC Claim Issues Receiving the Most IRS Attention

Not every ERC claim faces elevated risk. However, several issues consistently appear in reviews, examinations, and disputes.

1. Unsupported Government Order Claims

Businesses that qualified based on operational disruptions should be able to identify the specific government orders that affected them and explain the resulting impact on their operations.

2. Weak Partial Suspension Positions

A business experiencing challenges during the pandemic does not automatically meet ERC requirements. The ability to demonstrate a qualifying operational impact remains critical.

3. Gross Receipts Calculation Errors

Revenue-based qualification tests require accurate calculations and appropriate comparison periods. Inconsistencies can create questions even when the underlying claim is otherwise valid.

4. PPP and ERC Wage Overlap

Businesses that benefited from both programs must show that the same wages were not used for multiple tax benefits.

5. Aggregation Rule Mistakes

Organizations with common ownership, multiple entities, or related operations frequently encounter issues when applying ERC aggregation requirements.

Key Takeaway

The biggest ERC risks in 2026 typically stem from one of two problems:

• The business cannot clearly support its eligibility position.
• The business lacks the documentation needed to support the claim.

In many cases, the issue isn't fraud or intentional misconduct. It's the inability to connect eligibility conclusions to records that can withstand scrutiny years after the claim was filed.

4. Understanding ERC Claim Documentation Requirements in 2026

A strong ERC claim is ultimately a documentation exercise.

Even if a business had a legitimate basis for claiming the credit, the inability to support that position years later can create unnecessary challenges during an inquiry or examination.

Documentation Businesses Should Have Readily Available

Eligibility Support

• Government orders that directly affected operations
• Analysis explaining how those orders impacted the business
• Revenue comparison schedules, where applicable
• Internal records supporting qualification conclusions

Payroll Support

• Payroll registers
• Employee wage reports
• Health insurance cost allocations
• ERC calculation workpapers

PPP Coordination Support

• PPP forgiveness applications
• Payroll costs used for forgiveness
• Wage allocation schedules showing no overlap between PPP and ERC benefits

Common Documentation Gaps

Many businesses discover their files contain:

• Eligibility conclusions without supporting analysis
• Revenue calculations with no backup schedules
• Missing payroll reconciliations
• Incomplete records from third-party ERC consultants

These gaps may not invalidate a claim, but they can make it significantly harder to defend.

The businesses in the strongest position today are those that can clearly answer a simple question:

"How did we determine eligibility, and what evidence supports that conclusion?"

5. How Businesses Can Conduct an ERC Eligibility Review Before the IRS Does

For many organizations, 2026 is an ideal time for a proactive review.

This is particularly important for claims that were prepared quickly during the height of ERC demand or by advisors no longer involved with the business.

Start With the Original Eligibility Position

Identify the basis used to qualify:

• Government order suspension
• Partial suspension of operations
• Gross receipts decline
• Recovery startup business provisions

The goal is to determine whether the supporting rationale remains clear and defensible today.

Validate the Numbers

Review:

• ERC calculations
• Payroll reports
• Revenue schedules
• Employee counts
• PPP forgiveness allocations

Minor inconsistencies can often be addressed before they become larger compliance concerns.

Assess Documentation Quality

Ask the following:

• Can each eligibility conclusion be supported?
• Are key records easily accessible?
• Does management understand how the claim was prepared?
• Would another advisor reach the same conclusion based on the available evidence?

If the answer to multiple questions is "no," further review may be warranted.

A proactive ERC eligibility review is not about assuming a problem exists. It's about understanding potential exposure before an inquiry arrives. Recent findings on lessons learned from ERC compliance and improper claim risks highlight why businesses should ensure their eligibility positions and supporting documentation can withstand future scrutiny.

6. Signs Your Business May Face Elevated ERC Audit Risk

Not every ERC claim carries the same level of risk.

Certain characteristics tend to attract greater scrutiny because they involve more complex eligibility interpretations or higher dollar amounts.

Potential Audit Risk Indicators

The Claim Was Prepared Primarily by an ERC Promoter

Businesses should understand the assumptions used to support their claim, regardless of who prepared it.

The Qualification Rationale Is Vague

Statements such as:

• "COVID impacted our business"
• "Supply chain issues affected operations"
• "Everyone in our industry qualified"

may not provide sufficient support on their own.

Documentation Is Difficult to Locate

Missing records don't automatically mean a claim is incorrect, but they can significantly complicate the review process.

Multiple Entities Were Included

Businesses with common ownership structures often face additional complexity due to aggregation rules.

The Refund Was Material to the Business

Larger claims generally require more robust supporting documentation and analysis.

Key Insight

The best way to reduce ERC audit risk is not by preparing for an audit after receiving a notice.

It's by ensuring today that the claim can be explained, supported, and defended with confidence.

7. Responding to IRS ERC Inquiries, Notices, and Disallowance Letters

Receiving an IRS notice related to an ERC claim does not automatically mean the claim is incorrect. In many cases, the agency is simply requesting additional information to validate eligibility, calculations, or supporting documentation.

The worst response is often no response.

If Your Business Receives an ERC Notice

Review the Notice Carefully

Determine:

• What information is being requested
• Which tax periods are involved
• Applicable response deadlines
• Whether the inquiry relates to eligibility, calculations, or documentation

Gather Records Before Responding

Avoid rushing into a response without supporting evidence.

Instead, assemble:

• Eligibility analyses
• Payroll records
• Revenue comparison schedules
• Government-order support
• ERC calculation workpapers

A complete and organized response is generally more effective than submitting documents in multiple rounds.

Verify the Original Claim Position

Before responding, confirm that the explanation provided to the IRS aligns with the basis used when the claim was originally prepared.

Inconsistencies between the claim, supporting documents, and response narrative can create unnecessary complications.

When Professional Support May Be Valuable

Businesses often seek additional support when:

• Large refunds are involved
• Documentation gaps exist
• Multiple entities are included in the claim
• The notice challenges eligibility
• The matter progresses beyond an information request

The goal should not be simply answering the notice. It should be presenting a clear, well-supported case that addresses the IRS's questions directly.

8. What Businesses With Pending, Audited, or Disallowed ERC Claims Should Know in 2026

Not every ERC claim has reached an outcome.

Many businesses still have claims under review, while others are navigating audits, appeals, or disallowance actions.

If Your Claim Is Still Pending

Businesses should continue maintaining all supporting records even if the claim was filed years ago.

A common mistake is assuming documentation is no longer needed simply because the filing itself has been completed.

If Your Claim Is Under Audit

Focus on three priorities:

1. Maintaining organized documentation

2. Responding within required timelines

3. Ensuring all explanations are consistent with the original claim position

An audit often becomes more manageable when documentation has already been reviewed internally.

If Your Claim Has Been Disallowed

A disallowance does not necessarily mean the discussion is over.

However, businesses should understand their available options, applicable deadlines, and procedural requirements before deciding how to proceed. Businesses managing unresolved claims should also monitor developments related to ERC processing timelines, taxpayer rights, and IRS review activities.

The key takeaway is simple:

Whether a claim is pending, audited, or challenged, businesses should approach the situation proactively rather than waiting for the next IRS communication.

9. ERC Compliance Is Now More Important Than ERC Filing

For several years, the conversation around the Employee Retention Credit centered on eligibility, refunds, and filing opportunities.

In 2026, the conversation shifted.

The most important question is no longer whether a business claimed the ERC. It is whether that business can clearly support its eligibility position, calculations, and documentation if scrutiny arises.

Organizations that take time to review records, validate supporting evidence, and address potential gaps today will be in a far stronger position than those forced to react under pressure later.

As ERC reviews, audits, and appeals continue, preparation remains the most effective risk-management strategy.

Struggling to Validate Your ERC Claim Documentation?

Unsure whether your ERC documentation would withstand an IRS review? Let PABS help assess claim support, identify documentation gaps, and strengthen your audit readiness before issues arise.