Bill Would Bar ERC Claims Filed After January 31, 2024
Yesterday, the House of Representatives passed the “One Big Beautiful Bill Act.” Included among the sweeping 1,000-page legislative package are provisions (Section 112205: Enforcement Provisions with Respect to COVID-Related Employee Retention Credits) that, if enacted into law, will invalidate all Employee Retention Tax Credit (known as ERC or ERTC) claims filed after January 31, 2024. The bill also (i) includes substantial penalties applicable to certain ERC providers, made retroactive to March 2020, and (ii) lengthens the statute of limitations period on assessment for ERC-related claims from three or five years (depending on which quarters are being claimed) to six years. The bill, which passed in the House on a 215–214 vote, will now move on to the Senate Finance Committee, where it will likely go through significant revisions.
Current law enabled taxpayers to claim COVID-related ERC benefits until April 15, 2025. The retroactive disallowance contained in the bill will bar any ERC claims filed after January 31, 2024, impacting a large number of taxpayers who filed what were timely ERC claims under current law within the last 15 months of eligibility.
If passed, the bill will extend the statute of limitations on assessment for ERC refunds that were erroneously paid from three or five years (depending on which quarters are being claimed) to six years. The bill will also extend the period for taxpayers to claim valid deductions for wages attributable to invalidated ERC claims to six years to be co-extensive with the extended period for assessing additional tax with respect to ERC claims created by the bill.
The bill also imposes significant penalties and imposes reporting requirements on ERC providers who meet the legislation’s definition of a “COVID-ERTC promoter.” Among other things, the bill includes penalties for aiding and abetting the understatement of tax liability by a COVID-ERTC promoter for the greater of $200,000 ($10,000 in the case of a natural person) or 75 percent of the gross income of a COVID-ERTC promoter for providing aid, assistance, or advice with respect to an ERC claim. The bill defines a COVID-ERTC promoter as any person who provides aid, assistance, or advice with respect to a return, affidavit, claim, or other document relating to an ERC claim, who charges or receives a fee based on the amount of the refund or credit, and whose gross receipts for such activities exceed certain thresholds. This is intended to capture companies that charged contingency fees based on a percentage of the ERC claim paid to their clients by the IRS, a practice that, while permissible, the IRS nevertheless has publicly decried.
ERC Background
The ERC, created under the CARES Act to assist businesses that continued to pay their employees during the COVID-19 pandemic, is a refundable tax credit that allows employers to offset their employment taxes against a percentage of qualified wages paid to employees. Eligible taxpayers can claim the ERC on an original or amended employment tax return for an eligible period between March 13, 2020, and December 31, 2021. To qualify for the ERC, a business must meet one of the following three criteria:
- Experienced a full or partial suspension of operations resulting from a government order issued due to the COVID-19 pandemic during 2020 or the first three quarters of 2021;
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 as defined by the criteria set forth in the appropriate IRS guidance (Notice 2021-20 for 2020 and Notice 2021-23 for 2021);
- Qualified as a recovery startup business for the third or fourth quarters of 2021 as defined in Notice 2021-49.
Since October 2022, the IRS has been warning taxpayers to be wary of what it considers to be dubious ERC schemes. In March 2023, the IRS issued IR-2023-49, placing abusive ERC schemes at the top of its 2023 list of “Dirty Dozen” transactions.
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