How to Handle Client ERC Claim Under IRS Review: A 2026 Practitioner Playbook

How to Handle Client ERC Claim Under IRS Review: A 2026 Practitioner Playbook

Knowing how to handle client ERC claim under IRS review is now a core skill for every solo practitioner. As of August 2026, roughly 17,300 Employee Retention Credit claims remain in review, audit, or appeals. Courts have also turned sharply against weak suspension-test theories. Therefore, you need a repeatable system. This guide gives you that system, plus a way to bill the work as premium Employee Retention Credit advisory and controversy support.

Table of Contents

• Key Takeaways
• Where Do ERC Claims Stand in 2026?
• How Do You Handle Client ERC Claim Under IRS Review Step by Step?
• Why Are Courts Rejecting Supply Chain ERC Claims?
• What Should You Do After a Letter 105-C Disallowance?
• When Should a Client Withdraw an ERC Claim?
• What Penalty Exposure Do You and Your Client Face?
• How Do You Price ERC Controversy Work Profitably?
• Uncle Kam in Action: The Solo Firm ERC Triage
• Related Resources
• Next Steps
• Frequently Asked Questions

 

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Key Takeaways

• About 17,300 ERC claims remained in IRS review, audit, or appeals as of August 2026.
• Re-test every claim under the gross receipts test before defending a suspension theory.
• Letter 105-C starts a two-year clock to file a refund suit in federal court.
• Form 907 can extend that two-year window when both parties sign it.
• Bill ERC triage as a fixed-fee advisory engagement, never as unbilled cleanup.

Where Do ERC Claims Stand in 2026?

The Employee Retention Credit is no longer a refund story. It is a controversy story. The IRS Employee Retention Credit program page reports that about 17,300 claims remained open as of August 1, 2026. Furthermore, those claims are spread across several distinct stages. Each stage demands a different response from the practitioner holding the file.

Knowing the exact stage matters more than most practitioners realize. A claim in general review needs a proactive substantiation package. A claim in audit needs an examination strategy. A claim awaiting disallowance response needs a deadline calendar. Therefore, the first move is always classification.

The 2026 ERC Inventory Breakdown

Claim Stage (Week Ending 8/1/2026)	Approximate Count	Priority Action for the Firm
Under review	2,300	Build the substantiation binder now
Pending payment or disallowance	2,900	Confirm eligibility before the check arrives
Under audit	4,400	Engage with a signed Form 2848
Awaiting disallowance response review	6,100	Track the suit deadline carefully
With Independent Office of Appeals	Remainder	Prepare a hazards-of-litigation memo

Why the Compliance Push Intensified

A February 2026 Government Accountability Office report changed the tone. It found that roughly 83% of $235 billion in ERC refunds went out well after the pandemic period ended. Consequently, the IRS sharpened its enforcement posture. Moreover, the agency now openly advises taxpayers to re-review eligibility with an advisor.

That advice creates an opening for independent firms. Clients who used a promoter in 2021 or 2022 have no defense file. In addition, many of those promoters have closed. As a result, the client’s only remaining advocate is the practitioner who still answers the phone. That relationship is worth real money when it is structured correctly.

How Do You Handle Client ERC Claim Under IRS Review Step by Step?

The right way to handle client ERC claim under IRS review is a fixed seven-step workflow. Practitioners run the same steps every time. Consequently, they avoid the trap of improvising under deadline pressure. Here is the sequence that works best for solo firms.

The Seven-Step ERC Triage Workflow

1. Secure Form 2848 power of attorney and a signed engagement letter first.
2. Pull the IRS transcript to confirm the exact claim stage and dates.
3. Re-test the client under the gross receipts test for every quarter claimed.
4. If gross receipts fail, test the full or partial suspension theory honestly.
5. Assemble the primary document binder, including the actual government order text.
6. Choose a path: defend, withdraw, amend, appeal, or file suit.
7. Calendar every statutory deadline and document the client’s written decision.

Step three deserves special attention. Many claims defended on shaky suspension grounds actually qualify under gross receipts. However, nobody ever checked. Therefore, always run the receipts math first. It is objective, easy to prove, and courts do not second-guess arithmetic.

Gross Receipts Test Versus Suspension Test

Factor	Gross Receipts Test	Suspension Test
Proof type	Objective financial data	Facts, orders, and legal argument
Documents needed	Quarterly P&L, tax returns	Order text, operational impact analysis
Audit risk	Low if math is clean	High, especially supply-chain theories
Court reception in 2026	Generally respected	Increasingly hostile
Time to defend	2 to 5 hours	15 to 40 hours

Building the Substantiation Binder

Examiners want primary documents, not summaries. Therefore, the binder should include the full text of each cited government order. Add payroll registers tied to the exact wages claimed. Include a PPP loan reconciliation so no wages get double-counted. Finally, add a quarter-by-quarter eligibility memo signed and dated by the practitioner of record.

Solo practitioners who systemize this binder gain a real edge. The template can be reused across dozens of clients. Moreover, a repeatable deliverable justifies a fixed fee. Firms building repeatable advisory deliverables often lean on tax planning software with unlimited assessments so they can package analysis without burning per-report credits.

Why Are Courts Rejecting Supply Chain ERC Claims?

A clear trend emerged across 2026 district court rulings. Courts distinguished between orders that stop activity and orders that merely set conditions. One court framed the standard directly. An order does not limit commerce when it prescribes the conditions under which the same activity may continue at whatever volume the operator can achieve.

That distinction destroys most port-congestion arguments. Masking rules, distancing protocols, testing requirements, and worker-exclusion policies all set conditions. However, none of them cap output. Consequently, they do not support a partial suspension claim.

The Three Common Grounds for Dismissal

Courts have leaned on three independent grounds. Each one alone can sink a claim. First, the cited order regulated conditions rather than limiting commerce. Second, the affected operation was often exempted as essential infrastructure. Third, the supply-chain exception in IRS Notice 2021-20 is narrow and mechanical.

That third ground is the one most promoters ignored. The IRS Notice 2021-20 guidance requires a specific chain of proof. A downstream employer qualifies only when a named direct supplier could not deliver critical goods. Moreover, a governmental order must have forced that supplier to suspend its own operations.

Qualifying Versus Non-Qualifying Orders

Order Type	Likely Result	Reason
Mandatory full closure of the business	Qualifies	Activity stopped outright
Capacity cap at 50% of occupancy	Often qualifies	Volume was directly limited
Masking and distancing protocols	Generally fails	Sets conditions, not limits
General port or shipping congestion	Fails	Market condition, not an order
Essential business exemption applied	Fails	Operation was encouraged to continue

What This Means in Plain Terms

If a client’s claim rests on slow shipping or hard-to-find inventory, the position is weak. Furthermore, if the client stayed open under an essential-business exemption, the claim is weaker still. Practitioners should say that clearly and in writing. Honest counsel protects the client and protects the license. Firms that formalize this analysis inside a documented ERC strategy framework spend far less time reinventing the memo for each new engagement.

What Should You Do After a Letter 105-C Disallowance?

Letter 105-C is a formal claim disallowance. It is not the end of the road. However, it does start a hard clock. Under current law, the taxpayer generally has two years from the notice date to file suit. Missing that window ends the matter permanently.

Fortunately, the IRS created relief for taxpayers needing more time. The agency and the taxpayer can agree in writing to extend the suit deadline. Both parties must sign Form 907, Agreement to Extend the Time to Bring Suit, before the two-year period expires. A fully executed Form 907 buys administrative breathing room.

The Three Post-Disallowance Paths

• Administrative appeal with new substantiation the examiner never saw.
• Independent Office of Appeals review for a hazards-based settlement discussion.
• Refund suit in district court or the Court of Federal Claims.

Choose based on evidence quality, not emotion. If there are documents the examiner never reviewed, start administratively. Conversely, if the dispute is purely legal, Appeals may be faster. Litigation should be a last resort given the 2026 case law trend.

Fixing the Wage Expense Add-Back

Here is a detail many practitioners miss. Clients who claimed the ERC had to reduce wage expense on the income tax return. If the IRS later disallows the credit, that reduction becomes wrong. Therefore, the client is owed relief.

The IRS allows two approaches. Increase wage expense on the return for the year the disallowance became final. Alternatively, amend the original return. Run both calculations. Sometimes the amended return produces a larger benefit, especially if rates or income shifted. This analysis pairs naturally with broader proactive tax strategy work for the client.

When Should a Client Withdraw an ERC Claim?

 

 

Withdrawal is the cleanest exit available. If the IRS has not processed the claim, the client can withdraw it entirely. The same applies when a check arrived but was never cashed. Importantly, a valid withdrawal avoids penalties and interest on that claim.

Treat withdrawal as a serious client conversation. Document the eligibility analysis that led to the recommendation. In addition, get the client’s written authorization before submitting anything. The file should show that the decision was informed and voluntary.

Choosing Between Withdrawal, Amendment, and Defense

Client Situation	Recommended Path
Clearly ineligible, claim unprocessed	Withdraw the full claim
Check received but never cashed	Withdraw and return the check
Partly eligible, amount overstated	File a corrected adjusted return
Strong gross receipts decline documented	Defend with full substantiation
Refund cashed, eligibility doubtful	Explore correction and repayment options

Correcting an Overstated Claim

Sometimes the claim is partly right. In that case, withdrawal is the wrong tool. Instead, prepare a new adjusted return with the correct credit amount. Use Form 941-X, Form 943-X, Form 944-X, or Form CT-1X as applicable. Mail it to the address in that form’s instructions.

Include any other corrections for the same tax period at the same time. Furthermore, attach a short cover memo explaining the change. Examiners respond better to voluntary, well-documented corrections. It signals good faith and reduces penalty exposure meaningfully.

What Penalty Exposure Do You and Your Client Face?

Penalty risk runs in two directions. The client faces exposure for an excessive refund claim and for accuracy-related failures. Meanwhile, the practitioner faces preparer-level exposure for signing a position without a reasonable basis. Both risks are manageable with documentation.

Review Circular 230 practitioner standards before taking on inherited ERC work. Section 10.22 requires due diligence. Section 10.21 requires advising a client about known errors. Therefore, silence is not a safe option.

Protecting the Firm on Inherited Claims

• State in the engagement letter that the firm did not prepare the original claim.
• Document the eligibility re-test in a dated written memo.
• Advise the client in writing about any identified error.
• Record the client’s decision and keep the signed authorization.
• Never sign a position that cannot be defended with primary documents.

These five habits take under an hour per client. However, they represent the entire defense if things go wrong. Solo practitioners serving small business owners should treat this as standard operating procedure.

The Statute of Limitations Angle

Assessment periods for ERC claims vary by quarter. Some third and fourth quarter 2021 claims carry an extended assessment window. As a result, a client may remain exposed longer than they expect. Map every quarter’s deadline in a single client-facing chart.

That chart alone is a billable deliverable. Clients pay for clarity about their risk window. Moreover, it naturally leads to a broader planning conversation.

How Do You Price ERC Controversy Work Profitably?

Most solo firms absorb ERC cleanup as unbilled favor work. That is a costly mistake. Instead, split the work into two products. Product one is a fixed-fee eligibility triage. Product two is the representation engagement that follows.

A Simple Two-Product Fee Model

Price the triage at a flat rate covering roughly four to six hours. Deliver a written eligibility memo, a deadline chart, and a recommended path. Clients understand and accept that scope easily. Furthermore, the memo converts a large share of buyers into the representation engagement.

Price representation hourly or as a phased fixed fee. Examination response is phase one. Appeals is phase two. Litigation support is phase three. Each phase gets its own authorization. Consequently, the firm never works beyond an approved budget.

Turning Cleanup Into Recurring Advisory

ERC triage opens a deeper conversation. The same client usually has entity, retirement, and compensation gaps. Therefore, close every triage engagement with a forward-looking planning offer.

Many firms also revisit structure at this stage. A client who survived an ERC review is usually open to entity structuring guidance. Likewise, the MERNA method framework gives practitioners a repeatable sequence for that next conversation. Client-facing modeling tools help too: firms in Utah frequently run scenarios through the Salt Lake City advisory tools including the LLC vs S-Corp calculator when presenting restructuring options, and the statewide Utah small business tax calculator suite covers regional clients outside the metro.

Uncle Kam in Action: The Solo Firm ERC Triage

Here is a hypothetical example of how this works in practice.

The Scenario. Imagine a solo EA running a six-figure firm. A longtime client, a regional food distributor, receives an ERC examination notice. A promoter filed the original claim in 2022. The claim totals roughly $310,000 across four quarters. The promoter is no longer reachable.

The Challenge. The claim rests entirely on supply-chain delay language. There is no order text in the file. There is no wage reconciliation. Meanwhile, the client assumes the EA will handle it for free. The EA faces forty hours of unbilled exposure and real Circular 230 risk.

How Uncle Kam Would Approach It. First, scope a fixed-fee triage engagement before any analysis begins. Second, secure Form 2848 and pull transcripts. Third, re-test every quarter under the gross receipts test. Suppose two quarters show a decline exceeding the required threshold. Those quarters become the defended core.

Illustrative Numbers. Assume the two defensible quarters support roughly $140,000 of the original claim. The remaining $170,000 rests on the weak supply-chain theory. The EA could recommend a corrected adjusted return for the unsupported portion. That correction could reduce potential penalty exposure by a meaningful amount. In addition, the disallowed portion may unlock a wage expense add-back worth several thousand dollars in deductions.

The Business Outcome. The EA bills the triage as a flat-fee deliverable. Representation follows as a separate phased engagement. As a result, forty unbilled hours become a structured, profitable project. See real client results for actual outcomes from advisory-led firms.

Related Resources

• Tax preparation and filing support services
• Tax strategy blog for practitioners
• Key tax deadlines and filing calendar
• In-depth tax planning guides library

Next Steps

• Run a client list query for every Form 941-X filed since 2021.
• Build a one-page triage memo template that is reusable across clients.
• Calendar all Letter 105-C two-year suit deadlines immediately.
• Draft a fixed-fee ERC triage engagement letter this week.
• Benchmark the offer against a documented Employee Retention Credit advisory playbook before pricing it.

Build the System Behind the Work

Controversy triage is profitable, but it is reactive. The firms winning in 2026 pair it with a proactive advisory engine. Learn how the Uncle Kam marketplace helps tax pros transition to advisory, including the AI planning software, MERNA certification, and a steady flow of warm business-owner leads. That combination turns one-off cleanup projects into recurring annual retainers.

Ready to move? Book a free strategy session with a growth strategist and walk away with a personalized roadmap for launching or scaling an advisory practice. Bring the ERC caseload. The conversation starts there and ends with a pricing model the firm can run every year.

Frequently Asked Questions

Does port congestion qualify for the ERC?

Generally no. Courts in 2026 rejected claims built on generalized port delays. Congestion is a market condition, not a government order. Moreover, port operations were often exempted as essential infrastructure. Therefore, these claims carry high disallowance and penalty risk.

What is the ERC supply chain exception?

It is a narrow rule in IRS Notice 2021-20. A downstream employer may qualify only under strict conditions. A named direct supplier must have failed to deliver critical goods. In addition, a governmental order must have forced that supplier to suspend operations.

Can a client still withdraw an ERC claim in 2026?

Yes, in specific situations. Withdrawal works when the IRS has not processed the claim. It also works when a refund check arrived but was never cashed. A valid withdrawal avoids penalties and interest. Always document the client’s written authorization first.

How long does a client have to file suit after Letter 105-C?

Generally two years from the disallowance notice date. However, the IRS and the taxpayer may extend that period. Both parties must sign Form 907 before the two years expire. Calendar this deadline the day the letter arrives.

What happens to the wage deduction if the ERC is disallowed?

The client can recover it. Increase wage expense in the year the disallowance became final, or amend the original income tax return. Run both options and compare the benefit. Many clients overlook this valuable recovery entirely.

Should a firm charge clients for ERC audit defense work?

Absolutely. This is skilled representation work, not routine compliance. Start with a fixed-fee triage assessment. Then scope defense, appeals, and remediation separately. Clients respect clear pricing tied to clear deliverables. Unbilled cleanup destroys solo firm profitability fast.

How do practitioners find more of this work?

Start with the existing client list, then add a referral channel. Marketplace platforms route business owners who already need representation and planning. That removes the cold-outreach problem most solo firms face when adding a new service line.

This information is current as of 9/30/2026. Tax laws change frequently. Verify updates with the IRS if reading this later.

Last updated: September, 2026