The IRS released 3 new FAQ on March 20th 2025 that address some of the problems that arise with income taxes and ERC. These are looooong overdue, but they do provide some answers if you are inclined to take the FAQ from the IRS and act upon them. FAQ have been a big part of the IRS strategy for ERC guidance, but it’s also “only” an FAQ and that’s not the same kind of authority that the earlier Revenue Procedures carry. You can read through all the FAQ including the ones regarding income tax here on the IRS website Frequently asked questions about the Employee Retention Credit | Internal Revenue Service.

Q1. Wage reduction on the original return
Summary: In the first FAQ, the IRS addresses the issue of wage reduction on the original income tax return. According to the IRS, taxpayers should have reduced the wage expense on their original income tax return in accordance with §280C, regardless of whether they had received the ERC funds at the time of filing. The IRS explains that a taxpayer cannot deduct an expense as an ordinary and necessary business expense if they have a right or reasonable expectation of reimbursement at the time the expense was paid or incurred. This means that even if the ERC claim was still unpaid due to processing delays, taxpayers were expected to reduce their wage expenses on their original returns.

Tiger’s Take: I have no idea why they feel compelled to issue this FAQ. There is no new or uncertain information they are addressing or answering with this FAQ. Feel free to ignore this entirely, sorry you even had to read it, but I couldn’t really skip it in my writeup.

Q2. Taxpayer Got Late Claim and Did Not Reduce Wages
Summary: The second FAQ deals with situations where taxpayers received their ERC claims late and did not reduce their wage expenses on their original returns. The IRS states that under these circumstances, taxpayers are not required to file an amended return or an administrative adjustment request (AAR) to address the overstated wage expenses. Instead, they can include the overstated wage expense amount as gross income on their income tax return for the tax year in which they received the ERC. According to the IRS this approach aligns with the tax benefit rule, which requires taxpayers to adjust their gross income to account for previously overstated deductions.

Tiger’s Take: This was always the most likely outcome of the ERC / Income Tax problems and it’s finally arrived. The tax law reasoning behind it is a bit, and honestly it contradicts everything they said in Q1 above, but it’s a reasonable approach and it’s a nice out for the taxpayer’s who are trying to do the right thing. People getting money now in 2025 can pickup that income in 2025 and not lose sleep over the fact that the statute was closed and they never paid income tax on it.

Q3. Taxpayer reduced wages and later got a denial
Summary: The third FAQ deals with situations that are the opposite of the second FAQ. Taxpayers who did reduce wages but later received a denial from the IRS regarding their ERC claim. The IRS states that under these circumstances the taxpayer can either file an amended return (the statutes are mostly closed so that’s not an option for most) or they can pickup that expense in the year the denial occurs and any appeals are exhausted.

Tiger’s Take: This is again always the most likely outcome of the ERC / Income Tax problems and it’s basically just the opposite of Q2. If you did pay tax on your ERC in a prior year and now the IRS comes back to deny it / recapture it they’ll let you take the deduction now when the claim is ultimately denied.

It became clear in Sept 2023 when the moratorium was announced that a serious problem was going to exist between the income tax statutes and the income tax scenarios involving ERC. The IRS did not publish any guidance until late March 2025. This guidance is reasonably common sense which is appreciated, but it’s so late in the game that many taxpayers have already had to make hard choices.

Before you take action on any of these FAQ you should discuss the specifics of your situation and weigh the authority given to IRS FAQs vs the other applicable laws that the IRS is citing in their answers. This guidance is helpful, and provides easier avenues towards tax compliance, but you should still proceed with caution.