By If you received an Employee Retention Credit (ERC) refund in 2026 for wages paid in 2020 or 2021, you may have an opportunity to recover the tax you pay on that refund.
The IRS currently says that if you failed to reduce your wage deductions in the original years, you should report the receipt of an ERC refund in 2026 as taxable income in 2026. We have previously recommended following that guidance and filing a protective refund claim to preserve your rights while the legal issues are resolved.
A recent court case, Twitchco, gives that strategy additional support.
In Twitchco, a federal court ruled that the IRS could not use the “tax benefit rule” to tax an improper deduction from a tax year that was already closed by the statute of limitations. That reasoning may apply to many ERC recipients because the wage deductions became improper in 2020 or 2021—not when the refund check arrived in 2026.
This does not mean every taxpayer will win their ERC protective refund claim. The legal authority is limited; other courts have reached different conclusions, and the IRS is expected to defend its position aggressively. Your filing dates, the jurisdiction you live in, and the specific facts of your ERC claim can all affect the strength of your case.
For that reason, the protective refund claim remains the most prudent strategy for most taxpayers. It allows you to comply with current IRS guidance while preserving your right to a refund if the courts ultimately reject the IRS’s position.
If you want to discuss your ERC refund, please call me directly at xxx-xxx-xxxx.