Following a whirlwind of negotiations and a swift legislative push over the Independence Day weekend, H.R. 1, also called the One, Big, Beautiful Bill (OBBB), was signed into law on July 4, 2025. The OBBB enacts a wide array of tax changes, including several important modifications to the employee retention credit (ERC). The changes apply to certain ERC claims, but for affected employers, the changes can be very impactful. Our tax specialists review the OBBB’s changes to the ERC and evaluate its implications for taxpayers.
The OBBB ERC changes aim to manage risk of improper claims
The ERC is a COVID-19-era payroll tax credit enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. To some, the ERC is a thing of the past; the credit was available to employers for wages paid or incurred from March 13, 2020, to Sept. 30, 2021 (or Dec. 31, 2021, for recovery startup businesses), and the last deadline for retroactively applying for an ERC claim was April 15, 2025. Even so, the IRS continues to be concerned about fraudulent or improper ERC claims, and recently estimated that the IRS still had over 500,000 filed ERC claims waiting to be processed. Given the volume of outstanding ERC claims and the risk of paying improper claims, the OBBB revives ERC changes proposed in prior legislation and makes new changes to the program to limit eligible claims and expand the IRS’ options for pursuing improper claims.
The OBBB’s changes to the ERC
The OBBB makes significant changes to the ERC, but these changes only apply to ERC claims under Section 3134, which are claims relating to Q3 and Q4 of 2021. As a result, the OBBB’s changes don’t apply to ERC claims for wages paid or incurred from March 13, 2020, through June 30, 2021.
- Disqualifying certain ERC claims filed after Jan. 31, 2024. The bill disallows credits or refunds from being made after the enactment of the bill for Q3 and Q4 2021 ERC claims that were filed after Jan. 31, 2024. In most cases, the IRS hasn’t yet processed ERC claims that were filed after Jan. 31, 2024. Taxpayers who have a pending claim for a credit or refund from ERC claims filed after that date should be aware that the IRS will likely disallow that ERC claim.
- Extending the statute of limitations for ERC claims. The bill extends the statute of limitations for assessment of any amount attributable to a Q3 or Q4 2021 ERC claim to six years after the later of:
- The date on which the original payroll tax return was filed (or treated as filed) for the quarter relating to the ERC claim.
- The date the ERC claim was filed.
Prior to the passage of the OBBB, the statute of limitations for Q3 and Q4 2021 ERC claims was five years from the date the original payroll tax return was filed or treated as filed. The OBBB provision extends the statute of limitations an additional year and allows the statute of limitations to run from the date that the ERC claim was filed. Many taxpayers didn’t file their ERC claims on their original payroll tax return; they instead filed the claims on an amended payroll tax return, often a year or more after the original return was filed. Allowing the statute of limitations to run from the date the ERC claim was filed will significantly extend the window of time the IRS has to make an assessment for many Q3 and Q4 2021 ERC claims.
- Coordination of wage deductions for disallowed claims. Taxpayers who file ERC claims aren’t allowed to claim a wage deduction on their income tax returns for the wages they include in their ERC claim. If a Q3 or Q4 2021 ERC claim is disallowed, the bill extends the period of time taxpayers have to amend their income tax returns to claim a wage deduction for the amount of the disallowed ERC.
- New due diligence requirements for ERC promoters. The bill imposes a new requirement on ERC promoters to exercise due diligence when giving advice or aid with respect to any documents related to Q3 or Q4 2021 ERC claims for refund or advance payments of such ERC claims. The diligence requirement will work similarly to those for the earned income, child, and education credits. ERC promoters are service providers (excluding certified professional employer organizations) that provide assistance or advice regarding an ERC document:
- Collect a fee based on the amount of the ERC refund and have gross receipts from ERC assistance or advice in excess of 20% of their gross receipts for a specified year.
- Their gross receipts from ERC assistance or advice exceeds 50% of their gross receipts for a specified year.
- Their gross receipts from ERC assistance or advice exceeds 20% of their gross receipts for a specified year, and such gross receipts for such assistance or advice exceed $500,000.
ERC promoters who fail to satisfy the diligence requirement are subject to a penalty of $1,000 per instance.
- The penalty for erroneous refunds is expanded to apply to payroll tax returns. Section 6676 imposes a 20% penalty on an erroneous refund that’s made for an “excessive” amount, and the OBBB expands this penalty to apply to payroll tax and income tax. Prior to the passage of the OBBB, the IRS was able to impose several types of penalties on improper payroll tax refund claims, but this provision provides the IRS with an additional tool for imposing penalties on payroll tax returns going forward.
Where do ERC claims stand after these changes?
The OBBB’s changes to the ERC rules expand enforcement options available to the IRS for addressing improper ERC claims for Q3 and Q4 of 2021. Disqualifying pending ERC claims filed after Jan. 31, 2024, may not have a significant impact on the number of eligible claims because many taxpayers filed their ERC claims on or before that date. However, extending the statute of limitations to six years — and allowing it to begin from the time of the ERC claim’s actual filing — significantly extends the time the IRS has to evaluate pending claims for eligibility. Taxpayers with Q3 or Q4 2021 ERC claims may see a higher rate of audit for such claims since the IRS now has more time to make an assessment. Additionally, taxpayers may also see a slowdown in processing speed for Q3 and Q4 2021 ERC claims since the IRS now has significantly more time to evaluate the legitimacy of such claims.
How taxpayers should proceed with OBBB and ERC
The OBBB’s changes to the ERC can create complications for taxpayers who filed claims that are no longer valid or are subject to the extended statute of limitations. Taxpayers with jeopardized ERC claims should consult with their trusted tax advisor to evaluate the risk that their claims will be disqualified, and the potential costs arising out of potential IRS action. Understanding the options for resolving ERC-related tax disputes before the IRS takes enforcement action can be key to minimizing cost and procedural complications for resolving the dispute.
