Holly founded ExitPromise.com and has answered more than 3,000 questions asked by business owners about growing and selling a valuable business.She has also authored articles for FORBES and Intuit and been featured in podcasts for organizations such as the International Business Brokers Association.
- ERC Tax Return Amendment Rules Change - March 25, 2025
- Safe Financial Instruments Guide - December 4, 2024
- New Overtime Rule Increases the Salary Exemption Thresholds - November 19, 2024
On March 20, 2025, the IRS issued updated FAQs clarifying that taxpayers no longer need to file protective claims for amended tax returns related to the Employee Retention Credit (ERC). This update replaces earlier guidance, which recommended protective claims as a precaution and is being celebrated by business owners and their advisors alike.
Correcting ERC Tax Issues Without Amended Returns
The IRS now allows taxpayers to address ERC-related tax issues directly on current-year tax returns instead of amending past returns if they fall under one of the following two scenarios:
Scenario 1: ERC Refund Received, Amended Return Not Filed
- Problem: A taxpayer claimed the ERC but did not amend their tax return. They later received the ERC refund after the amended return deadline had passed.
- Solution: Report the ERC refund as gross income on the tax return for the year in which it was received.
The IRS has stated the following about this scenario:
You should address your overstated wage expense. Under these facts, you’re not required to file an amended return or, if applicable, an administrative adjustment request (AAR) to address the overstated wage expenses. Instead, you can include the overstated wage expense amount as gross income on your income tax return for the tax year when you received the ERC.
Scenario 2: ERC Claim Disallowed After Paying Taxes
- Problem: A taxpayer amended a return, paid tax based on an ERC claim, and later had that claim disallowed.
- Solution: Increase wage deductions on the tax return for the year the disallowance was finalized and after accepting the disallowance.
The IRS has stated the following about this scenario:
If your ERC was disallowed and you had reduced the wage expense on your income tax return for the year the ERC was claimed, you may, in the year your claim disallowance is final (meaning you are not contesting the disallowance or you have exhausted your remedies to argue against the disallowance), increase your wage expense on your income tax return by the same amount that it was reduced when you made your claim. Alternatively, you may, but are not required to, file an amended return, AAR, or protective claim for refund to deduct your wage expense for the year in which the ERC was claimed.
The Previous ERC Amendment Rules
Previous IRS guidance required taxpayers to amend tax returns to reduce wage deductions for the ERC credit claimed—2020 ERC claims affected 2020 returns, and 2021 ERC claims affected 2021 returns. Doing so would allow the taxpayer to file a claim for a refund for a tax year where unresolved tax matters are pending. This protective claim is made to preserve the statute of limitations when expecting a refund.
Filing the amendments for the ERC created challenges for business owners in several ways:
- Many were and are still awaiting ERC refunds beyond the amended return deadlines.
- When they filed amendments, their tax liabilities increased, and they did not receive the cash to pay the additional taxes.
- Some who received refunds forgot to amend their returns and could not correct their tax liability.
- Those with disallowed claims who had previously amended their tax returns couldn’t recover taxes paid because the amended return deadline had passed.
The updated IRS guidance issued on March 20, 2025, clearly outlines a path to resolving these issues without needing protective claims or amended returns.
Conclusion
These IRS updates provide much-needed clarity and relief for business owners navigating ERC-related tax adjustments. By allowing corrections on current-year returns, the IRS has simplified compliance, reduced administrative burdens, and ensured taxpayers have a straightforward way to address past ERC claims.
Business owners should review their unique situations and consult with their tax professionals to ensure proper reporting under the new guidance.
