ERC refund in 2026: One great way to handle it

If you received a $100,000 Employee Retention Credit (ERC) refund in 2026 for wages paid in 2020 and 2021, there is a practical way to handle it and also to protect yourself.

The short version is this: report the $100,000 as taxable income on your 2026 tax return, then file a protective refund claim so you can ask for that tax back later if the courts decide the IRS’s position is wrong.

That may sound odd at first.

If the credit is related to 2020 and 2021, why would it show up on a 2026 return? The answer is that the IRS now allows taxpayers to correct old ERC wage-deduction problems by reporting the amount as income in the year the refund is received, rather than going back and amending returns.

Why does this issue come up

The ERC was a payroll tax credit tied to wages paid during the pandemic. But for income tax purposes, the rule was never supposed to be “get a credit and also deduct all the same wages.” The tax law was designed to prevent that double benefit by reducing the wage deduction by the amount of the credit.

That worked fine in theory. In practice, many businesses filed ERC claims long after they filed their 2020 and 2021 income tax returns. And then many of them had to wait years for the IRS to process the claims. Many are just now, in 2026, receiving their refund checks, and those 2020 and 2021 tax years are likely closed by the three-year statute of limitations.

That creates the problem. The wages should have been adjusted in the earlier years, but those years may now be closed to changes because they are beyond the normal statue of limitations.

The IRS says do this now

The IRS’s current position is straightforward. If you claimed the ERC, did not reduce your wage deductions in the correct earlier year, and received the refund later, the IRS says you can include that amount in income in the year you receive the refund.

In this example, that means including the $100,000 on your 2026 return.

This is the IRS’s practical fix. It avoids reopening old returns and gives the government a way to recapture the earlier tax benefit in a year that is still open.

For many taxpayers, that is the cleanest filing position. It follows current IRS guidance, it is easy to explain, and it keeps the return from turning into a technical fight.

Why a protective claim makes sense

Here is the second half of the strategy.

There is a real legal debate about whether the IRS is correct to use the tax benefit rule this way.

A good argument exists that the ERC should affect only the old wage deductions from 2020 and 2021, and that if those years are closed, the IRS should not be able to force the amount into income in 2026 just because the refund arrived late.

That is where a protective refund claim comes in.

A protective claim is simply a timely refund claim filed now to preserve your rights in case a future court decision changes the result. In other words, you paid the tax on the $100,000 because that’s what the IRS wants. But if the courts or another authority rule that the tax benefit rule does not apply to your $100,000, you want the tax you paid on that $100,000 back in your pocket.

How it works in your situation

Assume you received a $100,000 ERC refund on June 1, 2026, and the related 2020 and 2021 income-tax years are closed.

That road to remedy for you looks like this:

Report the $100,000 as income on your 2026 return, following the IRS’s current ERC guidance.
Pay the resulting tax with the 2026 return.
File a protective refund claim for 2026 that says the inclusion was made to follow current IRS guidance, but that you want a refund if the courts or another authority later decide that the tax benefit rule does not apply in this ERC setting.

This puts you in the driver’s seat. You are not fighting the IRS today, and if things turn out to your benefit, you can later recover the tax you paid.

Why this is a good choice

If you have the cash now to pay the added 2026 tax, this approach makes sense.

First, it follows the IRS’s current instructions. That matters because the IRS has already told taxpayers how it expects this to be reported, and following that guidance reduces the risk of an immediate dispute.

Second, it preserves your upside. If the courts eventually say the IRS stretched the tax benefit rule too far, your protective claim keeps the door open to get your money back.

Third, it is disciplined. You are not taking an aggressive return position today based on a legal theory that a court has not yet accepted. Instead, you are filing conservatively while preserving your legal rights.

FAQs

1.Why does a 2020/2021 ERC show up on a 2026 return?

The IRS says a later-year ERC receipt should be included in income in the year received when the original wage year is closed.

2.Do I still need to amend 2020 or 2021?

Not necessarily; the IRS says current-year income inclusion is acceptable in the closed-year case.

3.What is the point of a protective claim?

It preserves a possible refund position if authorities/ courts change the treatment in the future.

BergerCPAFirst, with over 35+ years of experience, offers comprehensive tax preparation services for individuals and businesses nationwide. Our commitment is to provide personalized attention while ensuring compliance and maximizing tax benefits. If you have any questions or would like to schedule a consultation, please call (201) 587-9200 or send us an inquiry.