The IRS has offered some guidance on the employee retention credit in the form of Frequently Asked Questions.
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Taxpayers and tax preparers assumed that the One Big Beautiful Bill Act (OBBBA) would answer some unanswered questions about the controversial Employee Retention Credit (ERC) program — and it did. The IRS has now issued FAQs to help taxpayers understand how the OBBBA provisions affect ERC claims and refunds.
Here’s what you need to know.
What is the ERC Programme?
The ERC program was intended as a way to help businesses keep the lights on during the pandemic. Under the ERC program, eligible employers included those that paid qualifying wages to some or all employees after March 12, 2020 and before January 1, 2022. Typically, to qualify, a business had to demonstrate that a government order closed the business due to the pandemic during 2020 or the first three calendar quarters 1 or 2. collections during the relevant periods in 2020 or the first three calendar quarters of 2021. Certain businesses may also qualify as turnaround startup businesses for the third or fourth quarter of 2021.
The amount of the credit was substantial: 50% of up to $10,000 in wages, meaning it could reach $5,000 per worker in 2020 and up to $21,000 per worker in 2021.
When it comes to the ERC, what has changed under the OBBBA?
The OBBBA introduced new provisions aimed at addressing inappropriate ERC claims and clarifying time limits for claiming or refunding credits.
Specifically, the law (under OBBBA section 70605(d)) prevents the IRS from allowing or refunding ERCs after July 4, 2025, for the third and fourth quarters of 2021, if those claims were filed after January 31, 2024, even if you otherwise met the eligibility requirements.
Other parts of the bill strengthen compliance enforcement by imposing penalties on certain ERC sponsors who fail to meet due diligence requirements when assisting with certain credit claims.
Why were there changes in the first place?
According to the IRS, the ERC program was a magnet for fraud. In September 2023, citing “increasing concerns about a flood of improper employee retention credit claims,” the IRS announced an immediate moratorium on processing new ERC claims. “We assumed we would see a trickle,” said then-IRS Commissioner Danny Werfel, referring to the timing of the claims. “We are seeing a tsunami.”
At the time of the announcement—well after the pandemic had ended—the IRS reported receiving 3.6 million ERC applications. The open inventory currently includes approximately 600,000 returns—most of which were received in the last 90 days. This represents 15% of all ERC claims since the program opened.
Werfel ordered the moratorium after growing concerns within the IRS and from tax professionals, as well as media reports, that a significant portion of new claims from the aging program are ineligible. The taxman’s fear was that businesses were pressured and duped by aggressive promoters and marketers, and therefore made inappropriate ERC claims that could put them at financial risk.
To address some of these issues, in December 2023, the IRS announced a Voluntary Disclosure Program (VDP) for businesses that wish to repay money they received after filing erroneous ERC claims. The program closed on March 22, 2024, after the IRS received more than 2,600 applications with $1.09 billion in improper claims. Businesses accepted into the program had to pay only 80% of the credit they received. In addition, the IRS does not charge interest or penalties on any credits that are repaid. And, if the IRS had paid interest on an ERC refund claim, businesses would not have to repay that interest.
Last November, the IRS launched a second ERC voluntary disclosure program, which only applied to tax periods in 2021. Under this version, businesses had to repay 85% of the credit they received. As before, the IRS does not charge interest or penalties on any credits that are paid off on time. And as before, if the IRS paid interest on the ERC refund claim, businesses did not have to repay that interest.
Businesses that did not qualify for the voluntary disclosure program but submitted a questionable claim could also consider withdrawal. Under the withdrawal option, individuals who have submitted an ERC claim but have not received a refund can withdraw their submission, avoiding future repayment, interest and penalties.
Despite these options, the IRS still faced a huge backlog of ERC claims they considered fraudulent. Congress put an end to some of what were considered last-minute claims—and most likely, the IRS thought were fraudulent—with these new (retroactive) restrictions under the OBBBA.
Are all ERC claims for Q3 and Q4 2021 restricted under OBBBA?
No, only new ERC claims filed after January 31, 2024 are limited by section 70605(d). If you submitted an ERC claim before this time, you are not affected. If you have already received your ERC refund, you are not affected (barring fraud or other misconduct).
What if I claimed an ERC for the third or fourth quarter of 2021 before 31 January 2024 and then submitted an amended return withdrawing it?
There is no effect. Section 70605(d) does not apply to your amended return. The IRS will process your amended return, withdrawing the ERC you requested.
Can I still file a return claiming an ERC for the third or fourth quarter of 2021 if I missed the January 31, 2024 deadline?
No. No new ERC claimed in refund for these periods will be allowed or refunded if submitted after the January 31, 2024 deadline. (Even without OBBBA, the statute of limitations has run.)
When is my tax return considered filed for OBBBA purposes?
An original or amended return claiming an ERC refund is considered filed on or before January 31, 2024, if the claim is properly mailed and mailed or filed with the appropriate IRS office by that date.
Can the IRS continue to process other items on a return if an ERC claiming that return is restricted by the OBBBA?
Yes. If the disallowed ERC claim is only one of the other items claimed on your return, the IRS can continue to process the other items.
Can I appeal if my ERC is disallowed as a result of the OBBBA?
Yes. If your claim is denied, you will receive a Letter 105-C, Claim Disallowed. You can appeal to the IRS Independent Appeals Office if you believe the IRS wrongly rejected it under the OBBBA.
(Quick note: Appeals are largely closed right now, thanks to the budget impasse. You can file your appeal early, but if you have an appointment related to the Independent Appeals Office during the shutdown, it will be canceled. IRS staff will reschedule those appointments when the government reopens.)
That’s good, right? Can I rely on this information?
Well, not exactly.
The IRS issued this guidance in Fact Sheet 2025-07.
But it is important to understand that the instructions found on the IRS website should not be treated as gospel. In particular, as the IRS has repeatedly reminded us, the FAQs and other information on the IRS website are not included in the Internal Revenue Service and cannot be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.
So what should I do?
I always encourage taxpayers to consult a tax professional. And, of course, keep in touch with our Forbes team for more information.
