The ERC world saw yet another dismal processing week. Many hoped the wave of ERC audits had run its course, but new IRS examination codes appeared on tax transcripts over the weekend. Despite reports that the IRS currently lacks senior leadership oversight of ERC, it’s clear that powerful forces, inside or outside the Service, are still steering enforcement in a way that is reminiscent of former Commissioner Danny Werfel’s vendetta against the program.
Adding fuel to the fire, the newest wave of Letter 105C denials introduces a troubling new “flavor”: full disallowances targeting recipients of Paycheck Protection Program (“PPP”) loans where the IRS suspects a “double-dip” occurred. Similar to past iterations of 105C denials aimed at claims with incomplete information, this latest version reflects the IRS jumping to conclusions without reviewing the full picture (e.g., the length of covered periods, allocation between wage and non-wage expenses, and use of “high earner” allocation strategies).
Some have speculated that the IRS may be shifting resources toward PEO-filed claims, which are not captured in TaxNow’s data. If true, the effort isn’t paying off as PEO clients are increasingly being forced to sue both their PEOs and the IRS simply to compel payment.
With a potential government shutdown now just two weeks away, it’s safe to say the ERC horizon hasn’t looked this bleak since September 14, 2023, when the IRS first delivered its sucker punch to the program.
📈 Total refunds made a modest increase to 74, only a hair up from last week’s 63, which ties the record for the third lowest week in the past two years.
📉 Average refund amount dipped to $134,801, down from last week’s $158,904.
📈 Total dollar volume made a trivial jump to $10.0M, up from $9.9M last week, marking the second lowest total of the year.
📈Average days from filing to refund rose to a shocking 603 days, up from 527 days. Considering the 1.65 year average, it is safe to say the IRS predilection towards 2024 and later filed 941-Xs has vanished.
1. PEOs in the ERC Hot Seat: Lawsuits Highlight Growing Tensions - In the PEO space, ERC disputes are heating up as more clients discover that refunds processed under their PEO’s EIN are being delayed, or in some cases allegedly withheld altogether. Bloomberg Tax recently reported a surge in lawsuits against payroll firms and PEOs, with claims ranging from breach of contract to deceptive trade practices. One of the most striking examples is Elite Installations v. S2 HR Solutions Group 1, LLC d/b/a Engage PEO (Case No. 25-004908-CI, Pinellas County, FL), where the plaintiff alleges Engage PEO received over $670K in ERC refunds for 2021 Q1–Q3, failed to notify them for nearly a year, and still has not remitted the funds or accrued interest. The case underscores a key pain point for PEO clients: because claims must be filed under the PEO’s EIN using Schedule R allocations, the client has little visibility into when refunds are actually paid. That lack of transparency is fueling litigation and frustration across the industry. On the positive side, advocates like Frost Law are stepping up for PEO clients, actively litigating these cases and pushing for accountability and timely disbursement, helping restore some confidence for businesses that feel trapped by their PEO arrangements.
2. DOJ Secures Prison Time in ERC Fraud Cases Involving Original 941 Filings - Recent developments underscore how aggressively prosecutors are treating abuses of ERC and related COVID-era tax credits. In one case, Carnell Ragan, 59, of Philadelphia, was recently sentenced to three years in prison and ordered to pay more than $1.6 million in restitution after helping prepare false tax filings to claim ERC funds. (justice.gov) In another case from the past week, Ryan Glidewell, a Tennessee man, pled guilty to conspiring with others to file false tax returns claiming both ERC and Paid Sick and Family Leave Credits. These schemes involved creating sham businesses with no employees or operations and, based on available details, were likely perpetrated through filing fraudulent original Forms 941 rather than amended 941-X refund claims. That distinction is crucial: these cases target outright fabricated filings, not legitimate businesses seeking credits through the proper amendment process. Together, they highlight the DOJ’s growing willingness to pursue criminal charges, and secure prison time, against ERC fraudsters.
3. Countdown to Shutdown: ERC Refunds at Risk of Further Delays - With Congress still negotiating funding ahead of the September 30 deadline, a partial government shutdown looms, and taxpayers, including businesses awaiting ERC refunds, may face consequences if lawmakers don’t agree on a continuing resolution. The political fight driving the stalemate has intensified: Democratic leaders have said they will not support any funding bill unless it includes an extension of the Affordable Care Act tax credits beyond 2025, while Republicans appear unwilling to concede, setting the stage for a bitter policy showdown that could trigger a shutdown. While essential IRS functions are likely to remain operational initially, many non-essential services will be furloughed or operate on skeleton staffs, which could mean significant delays in processing ERC refund claims, particularly those requiring manual review, documentation, or Schedule R allocations. IRS communications, dispute resolution, and customer support may be disrupted, increasing uncertainty and slowing disbursement of funds.
Kenny's Conclusions
Altogether, the data, enforcement trends, and political backdrop paint an increasingly grim picture for ERC claimants. Refund volumes remain at historic lows, audits are accelerating across multiple quarters, and denial letters are becoming more aggressive in scope. Add to that a looming government shutdown and the increasing number of lawsuits from frustrated PEO clients, and it’s clear that ERC processing is operating on life support.
For businesses still waiting on refunds, now is the time to double-check documentation, monitor your transcripts closely, prepare for possible correspondence audits, and stay alertto both IRS developments and legislative negotiations in Washington. The coming weeks will be critical in determining whether the backlog begins to clear, or whether ERC claimants are in for yet another round of uncertainty and delay.
Signing off!
Kenny Dettman, CPA
Disclaimer: *𝘋𝘢𝘵𝘢 𝘴𝘦𝘵 𝘪𝘴 𝘧𝘳𝘰𝘮 𝘢𝘱𝘱𝘳𝘰𝘹𝘪𝘮𝘢𝘵𝘦𝘭𝘺 14,000 𝘣𝘶𝘴𝘪𝘯𝘦𝘴𝘴𝘦𝘴 𝘵𝘳𝘢𝘤𝘬𝘪𝘯𝘨 𝘌𝘙𝘊*
