You weathered the pandemic by keeping a small number of employees on the payroll. You’ve applied for the Employee Retention Credit (ERC) expecting a boost and instead got a denial from the IRS. Now what?
Whether you’re running payroll for a small team or juggling operations on your own, getting denied can feel frustrating and confusing. But it’s more common than you might think.
In this article, we’ll break down why ERC claims get denied, what steps to take next, and how to strengthen your case if you plan to appeal or refile. We’ll also cover how better documentation and planning can help avoid issues the next time around.
Why ERC Claims Get Denied
There are some common reasons why ERC claims are denied. Review this list to see if your case falls into these categories.
Eligibility Confusion
Confusion over eligibility is one of the most common reasons ERC claims get denied. Let’s break down why this happens.
As a result of the IRS criteria for qualifying changing multiple times between 2020 and 2021, and many business owners misunderstood what actually counted.
Some assumed a general industry downturn was enough to qualify, without showing a specific revenue decline or evidence of a government-ordered shutdown. Others applied outdated rules without realizing newer legislation had shifted the requirements.
Here is a quick breakdown of who qualifies eligible.
Weak or Missing Documentation
Documentation shortfalls are another major reason claims fall short. Even if you meet the criteria, the IRS needs proof—payroll reports, headcount tracking, financial statements, and documentation of any government mandates that affected operations. Missing or messy records make it hard for the IRS to connect the dots, and claims that aren’t well-documented are more likely to be denied.
Wage Calculation Errors
Wage calculation errors can also cause problems. Some businesses mistakenly included wages already used for PPP forgiveness or claimed wages that didn’t qualify under ERC rules, such as those paid to majority owners or their family members. Others misapplied wages to the wrong eligibility periods or failed to break them out properly, leading to discrepancies that raise flags.
Filing Mistakes
Finally, basic filing mistakes can derail even a valid claim. This includes submitting incorrect or incomplete versions of Form 941 or 941-X, making math errors, or forgetting to include required attachments. In some cases, the IRS simply couldn’t verify the claim with what was provided.
Immediate Steps to Take After a Denial
Getting a denial letter from the IRS doesn’t always mean your ERC claim is dead in the water. But it does mean that time now matters.
Once you receive notice of ERC denial, the clock starts the appeals period. You now have two years to either file an appeal or initiate a suit in federal district court. This is important because action must be taken quickly if you intend to pursue the claim.
While there are certain legal mechanisms attorneys can use to extend the timeframe, these typically require filing in court. However, in many cases, a denial just means something in your original submission didn’t check out or wasn’t clearly documented.
Before you assume the worst, here’s how to regroup, reassess, and set yourself up for a stronger response.
Review the IRS Denial Letter Carefully
Start by reading the IRS notice line by line. It should explain why your claim was denied—whether due to eligibility concerns, missing documentation, or a calculation error. Pay close attention to which quarters were affected, what portions of the claim were denied (in full or in part), and what supporting information may have been flagged as insufficient. Understanding the IRS’s reasoning is the first step toward fixing it.
Talk to a Professional
If you handled your original claim on your own, now’s the time to bring in a CPA or tax attorney familiar with ERC claims. A professional can help you translate IRS language, identify what went wrong, and determine whether your situation warrants an appeal or an amended return. They’ll also know what documentation the IRS expects and how to present it clearly.
Gather Your Records
Before making any moves, make sure your paperwork is airtight. Pull together payroll reports, filed Form 941s, and any proof of qualifying government orders (especially local mandates or industry-specific restrictions; think places like Disney Springs or International Drive in Orlando that rely heavily on foot traffic).
Add sales data for the relevant quarters to support revenue decline and include a copy of your original ERC application and calculations. Even if you’ve submitted it before, organize everything as if the IRS didn’t see it.
Reevaluate Your Eligibility
This is also the time to double-check your own math and assumptions. Did your business actually meet the revenue decline or suspension requirements? Were your wage calculations accurate and free of overlap with PPP forgiveness or other credits? Are you missing any documentation that could tip the balance? You may uncover a small issue that can be corrected and a second look might change the outcome.
Identify and Fix Your Issues
Once you've reviewed your denial and gathered the necessary documentation, the next step is addressing the underlying issue. Whether it's a filing error, a documentation gap, or a question of eligibility, here’s how to approach a correction and prevent the same issues from happening again.
File an Amended Return (Form 941-X)
If your claim included incorrect wage calculations or incomplete information, filing an amended return is often the most effective fix. Be sure to include a written explanation that directly addresses the reason for denial and clearly label all supporting documentation. A well-organized resubmission can make a big difference in how your case is reviewed.
Clarify Eligibility Criteria
If the IRS questioned your eligibility, revisit the standards, especially around government-ordered suspensions or revenue decline.
- For suspension claims, include details like jurisdiction, dates, and how your business operations were directly affected
- For revenue-based claims, double-check that your comparisons follow the correct quarters and align with IRS guidance. Even small missteps can raise red flags.
Strengthen Your Documentation Practices
Use this as a chance to improve how you track and present your records:
- Organize payroll data, Form 941s, and government orders by quarter
- Keep everything digital and searchable
- Maintain a clear audit trail, especially if your location was affected by local foot traffic rules or closures (e.g., theme parks, convention centers, or destination retail zones)
Learn from Prior Filings
If you’ve had successful ERC claims in other quarters, review what worked. Look for consistencies in how documentation was submitted or how eligibility was framed. Replicating that format can strengthen your new submission and help avoid additional IRS back-and-forth.
The Bottom Line
Receiving a denial of your ERC claim isn’t the end of the road. In many cases, it’s something that can be addressed with the right next steps. Most issues come down to paperwork, not ineligibility.
By reviewing the notice carefully, organizing your records, and working with a professional, you may still be able to recover the credit or set yourself up for a stronger claim going forward.
If you need help responding to a denial or preparing for your next filing, schedule a consultation with our team at DiMercurio Advisors. We’ll walk you through your options, help you correct what needs fixing, and make sure your next move is the right one.
