How a claim reaches an examiner
An ERC claim on a Form 941-X is a claim for refund, and IRM 4.23.23.3.2.2 treats it as one: “COVID-19 Employer Credit claims are sent to ET-WSD for classification based on CAT-A criteria and are received through CIS.” The Employment Tax Workload Selection and Delivery unit's claim coordinator reviews new claims weekly, confirms the business operating division is SB/SE or LB&I, and uploads IDRS and external PPP loan forgiveness data (under an SB/SE memorandum with the Small Business Administration, used for the limited purpose of deciding whether an ERC should be disallowed) to support classification. A quarter already under examination is forwarded to that examiner's group.
From 2023 through April 2026 most pending claims went first through the Research, Applied Analytics and Statistics risk models described in IRM 21.7.2.7.8; claims the models flagged with Risked ERC-Exam Potential went to exam while others were disallowed by letter or paid. That has changed: “Effective May 1, 2026, AM will no longer send cases to RAAS for risking. Processable ERC claims not risked will be referred to exam using CAT-A 'HQ Reserved 10 ERC LUQ' for analysis/risking.” A pending claim today is therefore reviewed by Examination classification before it is paid or disallowed. The IRS's monthly inventory count on the ERC page showed about 3,000 claims under audit as of the week ending October 3, 2026, out of roughly 13,000 remaining.
Letter 6612 and the IDR
The opening letter for a claim under examination is Letter 6612. The IRS page describes it: “We're auditing your tax return reporting an adjustment or claim for refund and need documentation to verify the Employee Retention Credit (ERC) you claimed. We're holding the ERC until we get the results of this audit.” The letter encloses forms explaining the information required, and responses can be uploaded to the site in the letter, faxed or mailed. The page also tells an employer that cannot support the credit how to exit: call the number on the letter to withdraw, and the IRS will give specific instructions on how to withdraw. The withdrawal page confirms a claim under audit is withdrawn through the examiner, not the fax line.
The IDR attached to Letter 6612 follows a pattern the IRS presented at its 2023 Nationwide Tax Forum. The sample twenty-item request asks for, among other things:
- the Forms 941 for the quarters at issue and the worksheets used to compute the credit on the amended returns;
- payroll journals for the months in the claimed quarters, Forms W-2 for 2020 and 2021, a list of employees paid wages on which the credit was claimed and the wages paid to each;
- whether any employee is related to a shareholder owning 50 percent of the capital and profits, with a list and description of the relationship;
- “Documentation that operations were fully or partially suspended due to orders from appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19, OR documentation that the taxpayer experience a significant decline in gross receipts during the calendar qtr. ERC claimed”;
- a spreadsheet of gross receipts reconciled to annual gross receipts for 2019, 2020 and 2021, monthly or quarterly;
- PPP loan and forgiveness documents, including the wages listed on the forgiveness application, and an analysis of how wages were allocated between the ERC and the PPP loan for the first three quarters of 2021;
- documentation of how qualified health plan expenses were allocated to the credit; and
- the business income tax returns for 2020 and 2021, for review.
The IDR guide covers response mechanics; the point specific to ERC is that the examiner is testing eligibility quarter by quarter, so the response should be organized by quarter and by test.
What the examiner is testing
The Tax Forum materials and the ERC FAQs set out what the IRS considers a qualifying position. Three findings make a quarter eligible; the examiner needs one of them documented for each quarter claimed.
| Test | What the IRS looks for | Common failure |
|---|---|---|
| Full or partial suspension by government order | A copy of the order, proof it applied to the employer, and evidence of how it suspended operations. The IRS deck calls partial suspension a supply concept, not a demand concept; comparable telework means no suspension; modifications must have more than a nominal effect (the 10 percent safe harbors) on more than a nominal portion of operations | Reliance on OSHA guidance, CDC recommendations, a state of emergency declaration or orders that recommended rather than required; the IRS's 2023 legal memos on supply chain and OSHA communications address both |
| Significant decline in gross receipts | 2020: a quarter below 50 percent of the same 2019 quarter, ending the quarter after receipts recover to 80 percent; 2021: below 80 percent of the 2019 quarter, with the prior-quarter election; computed for the aggregated group | Receipts computed for one entity in an aggregated group; summary schedules without underlying records; comparison year other than 2019 |
| Recovery startup business | Trade or business begun after February 15, 2020 with average annual gross receipts of $1 million or less, Q3 and Q4 2021 only; credit capped at $50,000 per quarter (IRC 3134(b)(1)(B)) | Established businesses claiming Q4 2021, which the RAAS filter and Letter 6577-C paragraph R target |
Eligibility is then applied to wages. The deck summarizes the limits: for 2020, 50 percent of up to $10,000 of qualified wages per employee for the year (a $5,000 maximum), with all wages qualifying for employers with 100 or fewer full-time employees and only wages paid for not working for larger employers; for 2021, 70 percent of up to $10,000 per employee per quarter, with the 500-employee threshold. IRC 3134(a) and (b)(1)(A) state the 2021 rate and the $10,000 per-quarter cap. The examiner then removes wages paid to related individuals, wages used for PPP forgiveness (the same wages cannot be used for both PPP forgiveness and the ERC), wages used for sick and family leave credits or, in 2021, the research credit, and tests the health plan allocation. Aggregation under IRC 52(a), 52(b), 414(m) and 414(o) runs through all of it: the group is one employer for eligibility, the employee count and the gross receipts test, and “All members of aggregated group are eligible employers if one member of the group has business operations fully or partially suspended due to government order.”
Recapture without an exam: Letters 6577 and 6577-C
Not every reversal of a paid credit is an examination. IRM 21.7.2.7.10 describes filters SB/SE runs on accounts where COVID-19 credits were allowed: “For cases so identified, the IRS generally issues a 'soft' contact letter requesting additional information to substantiate the previously allowed credit(s). Generally, the letters indicate the IRS may disallow/reverse the credits if sufficient supporting information is not received.” The letters come from Ogden Campus Exam/AUR, with a fax line (855-246-4884) and a phone line in the letter.
Letter 6577 covered 2020: credits exceeding the $5,000 per-employee limit based on W-2 counts, credits exceeding 50 percent of reported ERC wages plus health expenses, and ERC wages plus leave wages exceeding total compensation. Letter 6577-C covers 2021 under six workstreams: credit exceeding the $7,000 per employee per quarter limit based on W-2s; credit exceeding the maximum based on the employee count on line 1; no Forms W-2 issued; business established after the period claimed; no net payment activity from 2019 to 2022; and a recovery startup business over the $50,000 fourth quarter limit. For each, the IRM says, “The incorrect credits claimed could include non-refundable and/or refundable portions of ERC.” The Taxpayer Advocate Service reported the IRS planned up to 30,000 Letters 6577-C in fall 2024, representing more than $1 billion, after an earlier round to more than 12,000 entities for 2020 producing $572 million of assessments.
The response path is in the letter: a signed statement and payment if the employer agrees, or a statement with supporting facts if not. If there is no response, the account is adjusted for the proposed change with penalties and interest and a balance due notice follows. IRM 21.7.2.7.10.9 tells assistors to advise an employer who disagrees after the adjustment that the IRS will consider late submissions of supporting information, sent to the fax line in the letter, and that the employer can also pay the account in full and file a claim for refund. A recapture that produces a balance carries collection due process rights when a lien is filed or a levy is proposed, and the underlying liability can be raised at the hearing if there was no prior opportunity to dispute it. The transcript shows activity code ERC RCPTR on these modules.
The assessment statute
The statute is the reason ERC exams are concentrated on the second half of 2021. The normal three-year period under IRC 6501 for Forms 941 runs from April 15 of the following year under the IRC 6501(b)(2) deemed-filing rule, and IRM 21.7.2.7.8 states that “The ASED has expired on Form 94XX for 2020 and 2021 except for certain ERC credits for 2021,” the normal dates being April 15, 2024 and April 15, 2025. The exception is IRC 3134(l), which covers wages paid after June 30, 2021 and before October 1, 2021 (through December 31, 2021 for a recovery startup business). As originally enacted it set a five-year period; section 70605 of Public Law 119-21 lengthened it. IRM 25.6.1.9.5.10 (rev. May 28, 2026) states the current rule: for assessments made after July 4, 2025 attributable to those credits, the period “will not expire before 6 years after the later of” the date the original return including the quarter was filed, the date it is deemed filed under IRC 6501(b)(2), or the date the claim for the credit was made. For assessments made before July 5, 2025 the five-year rule applied.
Three consequences. First, for a third quarter 2021 claim filed on a Form 941-X in, say, April 2023, the six years run from the claim date, to April 2029. Second, the IRM says the extended period “may also affect related income tax returns when wages are adjusted due to the denial of an Employee Retention Credit (ERC),” so the 2021 income tax year is not safely closed either. Third, 2020 and first-half 2021 quarters are generally closed to assessment, which is why their reversals came by Letter 6577 before April 2024 or not at all; a client whose 2020 credit was paid and never questioned is past the normal assessment date absent fraud. The assessment statute guide and the statute date calculator cover the general rules; Form 872 extensions are still requested in ERC exams approaching the date.
The six-year period is measured from the latest of three dates, and the claim date is one of them. A late-filed Form 941-X does not shorten the IRS's time; it lengthens it. Check the received date of the 941-X on the transcript before assuming a quarter is closed.
Penalties and interest
An ERC claim is a claim for refund or credit of employment tax, and IRC 6676 now reaches it. As amended by section 70605(f) of Public Law 119-21 on July 4, 2025, IRC 6676(a) applies where “a claim for refund or credit with respect to income or employment tax is made for an excessive amount,” and imposes a penalty of 20 percent of the excessive amount unless the excess is due to reasonable cause. The excessive amount is the claimed amount over the allowable amount, so a claim disallowed before payment can still draw the penalty. Where the credit was paid and is assessed back, the balance accrues interest from the refund, and failure to pay penalties follow notice and demand. Where the examiner develops willfulness, the civil fraud penalty and a referral are available; the IRS has said repeatedly that withdrawing or correcting a willfully fraudulent claim does not foreclose criminal investigation. Every penalty requires written supervisory approval.
How an ERC exam ends
For a claim held under Letter 6612, the examiner either allows it (in full or in part) or disallows it. A disallowance is issued as a Letter 105-C or 106-C, with the two-year refund suit period and Appeals rights described in ERC claim disallowance; IRM 21.7.2.7.11.1 shows Exam returning cases to Accounts Management with the case note Accepted - Allow in full Accepted - Allow in part or Routed to Appeals For a paid credit, the exam ends in an assessment: an agreed case closed on the examiner's report and agreement form (see signing an exam agreement), or an unagreed case with a 30-day letter and Appeals under the normal protest rules. If the assessment stands after Appeals, the route is payment, a refund claim on Form 941-X and, if disallowed, a suit under IRC 7422 within the IRC 6532 two-year period (see refund suits). Where a third-party payer filed under its own EIN, IR-2024-263 notes the third-party payer is the party that must correct the claim. The wage deduction consequences of a disallowed or recaptured credit are covered in the disallowance guide.
Preparing the file before the IDR arrives
The Tax Forum deck's Proactive Audit Considerations list is the IRS telling practitioners what it will ask for. For each quarter claimed, assemble: the governmental order and the records showing which operations it suspended and that the effect was more than nominal; the gross receipts computation for the quarter and the 2019 comparison quarter with source records; for a large employer, work records showing wages paid for time not worked; the health plan allocation method; the aggregation analysis; the Forms 7200 and employment tax returns filed; and, where a third-party payer filed, the records provided to it. Add the PPP forgiveness application showing which wages were used, and the ERC worksheets. Where the computation was done by a promoter who will not release it, rebuild it from payroll records before the examiner asks, because the IDR will ask for the worksheets by name. The IDR response cover letter template organizes the production, and a Form 2848 covering Form 941 for each quarter (and the related income tax years) should be on file before the first call.
Questions practitioners ask
Is an ERC audit an income tax audit?
No. It is an employment tax examination of the Form 941 or 941-X for the quarter, worked by SB/SE Employment Tax after classification by ET-WSD. The related income tax return is affected through the wage deduction, and the IRM notes the extended ERC statute can keep that return open for the corresponding wage adjustment.
How long does the IRS have to assess a 2021 ERC?
For wages paid July 1 through September 30, 2021 (through December 31, 2021 for a recovery startup business), IRC 3134(l) as amended gives six years from the latest of the original return's filing date, its deemed filing date or the date the claim was filed, for assessments after July 4, 2025. Other 2020 and 2021 quarters generally closed on April 15, 2024 and April 15, 2025.
What is the difference between Letter 6612 and Letter 6577-C?
Letter 6612 opens an examination of an unpaid claim and holds the credit pending documentation. Letter 6577-C is a campus recapture letter proposing to reverse a credit already paid, based on data filters; it is not an examination, and if there is no response the account is adjusted with penalties and interest.
Does the 20 percent IRC 6676 penalty apply to a claim that was never paid?
By its terms yes: the penalty is 20 percent of the amount by which the claim exceeds the allowable amount, absent reasonable cause, and since July 4, 2025 the section applies to employment tax claims. Whether it is asserted depends on the facts and requires supervisory approval.
Where does an unagreed ERC exam go?
To the Independent Office of Appeals on a protest after the 30-day letter. If the assessment stands, the remedy is payment, a refund claim and a suit under IRC 7422; for a disallowed unpaid claim, the Letter 105-C starts the IRC 6532 two-year refund suit period.