New ERC Laws are Here: What Are They?

In In January 2024, I wrote a series of blog posts about some changes to the Employee Retention Credit (“ERC”) laws that were being introduced in Congress:

1. Employee Retention Tax Credit Laws Could be Getting a Massive Overhaul

2. What Happens If Your ERTC Claim is Treated as a Listed Transaction? It's Complex.

3. What Happens if ERTC Advisors are Treated as "Material Advisors?" A Lot.

Many of those changes are now law. On July 4, 2025, President Trump signed into law the extensive tax reconciliation package (commonly referred to as the One Big Beautiful Bill). There are many different provisions unrelated to ERC, including those related to increased SALT caps, reinstatement of 100% bonus depreciation, taxability of tips, and many other provisions, but this post focuses on ERC issues.

First, the legislation retroactively terminates the ERC program for any claims for the third and fourth employment tax quarters of 2021 filed after January 31, 2024. Previously proposed legislation would have terminated the ERC program for all ERC claims filed after January 31, 2024. I expect there to be legal challenges made for claims filed after January 31, 2024.

Second, the legislation significantly extends the time period for the IRS to assess additional amounts (e.g., taxes, penalties, etc.) related to an ERC claim for the third or fourth employment tax quarter of 2021. The IRS can now adjust such an ERC claim as late as 6 years after the later of (1) the date the ERC claim was filed; (2) the date the return is treated as filed; or (3) the date on which the claim for credit or refund is made. If, hypothetically, an employer filed an ERC claim on January 31, 2024, the IRS could theoretically audit that claim into the next decade.

The IRS is quite possibly going to use this grant of more time to audit some of the ERC claims that have already been paid.

There is one silver lining, however. Congress has given taxpayers a right to claim a refund for any wage expenses that are reduced by virtue of an ERC claim that is later disallowed pursuant to these provisions, even if the statute of limitations for claiming a refund would otherwise have expired.

The legislation also has increased penalties and created heightened due diligence requirements for those defined as “COVID-ERTC promoters,” which the legislation generally defines as:

• A person who charges or receives a fee based on the amount of the ERC; and

• The aggregate of the gross receipts of such person exceeds (a) 20% of their total gross receipts, and the aggregate of the ERC-related gross receipts exceeds $500,000, or (2) more than 50% of their total gross receipts derive from ERC services regardless of total gross receipts.

There are aggregation rules that treat different persons as one COVID-ERTC promoter. Certified Professional Employer Organizations, however, are not considered COVID-ERTC promoters. Note, like the provisions above, these provisions apply to the third and fourth employment tax quarters of 2021.

There are also due diligence obligations for those defined as COVID-ERTC promoters, including potentially professionals who did not themselves file the ERC claims (e.g., those who determined eligibility). Failure to comply with these requirements is subject to a $1,000 penalty per failure, which the IRS can immediately assess without allowing the taxpayer to challenge the penalty pre-assessment. Post-assessment challenges remain possible.

Finally, the legislation extends the application of a 20% penalty for erroneous refund claims to erroneous ERC claims. This is not limited to the third and fourth employment tax quarters of 2021. If the IRS were to propose such a penalty, reasonable cause defenses can still be advanced.

The new ERC provisions are starkly different than prior law and provide the IRS with many new tools in the ERC space. Fortunately, due to Senate procedural rules, most of the provisions in the legislation pertain only to the third and fourth employment tax quarters of 2021. Regardless, employers, and those the IRS may view as ERC promoters, should be ready. If you have any questions about ERC, or any other civil or criminal tax matter, you can contact me at jglassman@meadowscollier.com or 214-749-2417.