ERC 2025–26: Audit & Cleanup for Restaurants & Franchises

If your business claimed the Employee Retention Credit (ERC), 2025–26 is about cleanup and defense, not new filings. The filing window is closed, enforcement is active, and the One Big Beautiful Bill Act (OBBBA) added limits that affect late-filed 2021 claims. This guide explains what changed, how to triage your position, and the records you need if the IRS asks questions.

Key reality: The ERC claim period is over. What matters now is whether your claim was eligible, well-documented, and timed within the new limits—otherwise you may need to withdraw, amend, or defend.

1) What changed (and why it matters)

• Claim window closed. As of April 15, 2025, the period to file ERC claims ended. If you didn’t file by then, you’re out; if you did, focus on support files, wage allocation, and risk triage.
• OBBBA limits late 2021 claims. IRS FAQ FS-2025-07 (Oct 22, 2025) explains a limitation on credits and refunds for ERC claimed for Q3/Q4 2021 if the claim was filed after Jan 31, 2024. Many late “promoter-pushed” claims fall here. Read the IRS FAQ and the companion news release.
• Enforcement is intense. The IRS says the vast majority of a large pool of ERC claims show risk indicators; audits and denials are ramping up. Translation: expect letters.

2) The three ERC paths now: withdraw, amend, or defend

A) Withdraw (fastest exit)

Use this if your ERC hasn’t been paid (or you received a check but haven’t deposited it) and you’ve concluded you’re ineligible. Withdrawal treats the adjusted return like it was never filed—and wipes penalties/interest tied to that claim.

B) Amend (fix technicals)

If you’re eligible but the math or wages were wrong—for example, double-counted wages, tips treated improperly, or PPP overlap—file corrected adjusted employment returns and fix the income-tax wage deduction (ERC reduces the wage expense in the year the qualified wages were paid).

C) Defend (you’re confident and documented)

If you meet eligibility tests and your documentation is tight, prepare an audit file now. Expect questions around government orders, gross-receipts tests, and how you calculated qualified wages.

3) Restaurants & franchises: common ERC trouble spots

1. “Supply chain” narratives without government orders. The IRS has repeatedly warned that supply chain issues alone don’t qualify. The narrow exception requires a supplier’s government-ordered shutdown, no viable alternate, and a clear causal link to your partial/full suspension—with copies of the actual orders. OSHA advisories and news articles don’t count.
2. Too many quarters claimed. Qualifying for every quarter is uncommon; the IRS flags this as a red flag. Re-test quarter by quarter.
3. Wage selection mistakes.

   • PPP overlap (double dipping).

   • Tipped wages and service charges misclassified.

   • Owner/relative wages are included when disallowed.

     Clean these up in amended filings and reconcile to payroll. (Remember: ERC reduces your income-tax wage deduction.)

4. Promoter paperwork. If your file is just a glossy “eligibility memo” with no orders, dates, revenue schedules, or headcount detail, you likely need to rebuild documentation.

4) Build an audit-ready ERC file (what to keep)

Eligibility backbone

• Government orders: copies, issuing authority, dates, and affected activities (by location).
• Gross-receipts tests: quarter-over-quarter schedules vs 2019 comparatives, by EIN.
• Narrative tying orders (or receipts drop) to how operations were partially/fully suspended (front-of-house, back-of-house, hours, capacity, supply).

Qualified wages

• Payroll registers by pay period with ERC wage picks highlighted.
• Tip/Service-charge detail (to avoid misclassifying wages vs tips).
• PPP/other credits interaction worksheet showing no double counting.

Reconciliations

• 941/941-X tie-outs by quarter and EIN.
• Income-tax adjustment for the ERC (wage deduction reduction).

Governance

• Who prepared the claim, how fees were structured, and who reviewed/signed off? (Contingent-fee promoters are a common audit question.)

5) What the OBBBA limitation means in practice

If your Q3 or Q4 2021 ERC claim was filed after Jan 31, 2024, the OBBBA limitation can restrict credits/refunds. The IRS FS-2025-07 explains how timeliness is determined, and the related news release outlines appeal rights when a late-filed refund is disallowed. Action item: check when your 941-X was filed and which quarters it covers.

6) Decision tree (use this with your controller)

Step 1 — Timeline check:

Map each ERC quarter, the file date of each 941-X, and whether refunds were paid/denied/pending. Flag Q3/Q4-2021 claims filed after 1/31/2024 (OBBBA limitation risk).

Step 2 — Eligibility test:

• If your claim relies on government orders, attach the actual orders (by location) and show how they restricted operations.
• If you qualify via gross-receipts decline, recompute with clean sales reports and bank statements.

Step 3 — Path

• Clearly ineligible or promoter-driven? → Withdraw before cashing a check to avoid penalties/interest.
• Eligible but math is off? → Amend and fix income-tax wage reduction.
• Eligible and documented? → Defend: assemble your file and be ready for IDRs (document requests). Enforcement will remain active through 2026.

7) Special notes for restaurant operators

• Tips vs. service charges: Make sure your payroll treatment is correct across the ERC period. This also affects the FICA Tip Credit (Form 8846) in open years—keep those workpapers separate and consistent.
• Multi-unit / multi-EIN: Keep ERC files by EIN and by quarter. If your promoter bundled locations together, unbundle and rebuild the support by entity.
• Vendors & delivery platforms: If supply disruptions are part of your narrative, identify specific suppliers, the orders that shut them down, and why no substitute was available. Vague “supply chain” claims are high risk.

8) What to expect from the IRS (letters & timelines)

• Risk review letters and IDRs (information document requests) asking for eligibility proof, order copies, wage selections, PPP coordination, and income-tax adjustments.
• Denials or partial allowances for late Q3/Q4-2021 claims under OBBBA. Know your appeals window and rights under the FAQ.
• Scam warnings will continue; use the IRS eligibility checklist if you’re on the fence.

How QMK helps you clean up ERC without blowing up cash flow

QMK Consulting is an accounting firm in New York City, specialized in franchise accounting and restaurant accounting (supporting clients nationwide). Our ERC clean-up and defense package includes:

• Quarter-by-quarter eligibility re-tests (orders vs receipts) and promoter file remediation.
• Withdrawal vs. amendment vs. defense memo—clear next step for each quarter/EIN.
• Recalculation of qualified wages, tie-outs to 941/941-X, and income-tax wage reduction entries.
• Audit-ready binders: orders, narratives, wages, PPP interactions, and sign-offs.

We align compliance work with operations—so you can focus on prime cost, labor cadence, and cash while we stabilize the tax side.

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Educational only—not tax or legal advice. Confirm specifics with current IRS publications and your advisor.