IRS Tightens Rules on Employee Retention Credit Claims

The Internal Revenue Service released a Frequently Asked Questions fact sheet on Wednesday concerning the Employee Retention Credit that was curtailed and received new enforcement provisions from July’s One Big Beautiful Bill Act.

The Employee Retention Credit was created by Congress during the COVID-19 pandemic to reward employers for keeping people employed during the height of the pandemic.

Under the ERC program, eligible employers are those who paid qualified wages to employees between March 13, 2020, and December 31, 2021. To qualify, businesses must show they were affected by a government-mandated shutdown related to the pandemic in 2020 or the first three quarters of 2021, or that they experienced a significant drop in gross receipts during those times. Additionally, some businesses may be classified as recovery startups for the last two quarters of 2021.

The credit was substantial, covering 50% of wages up to $10,000, which translates to a maximum of $5,000 per employee for 2020 and up to $21,000 per employee for 2021.

Under the massive tax law, no ERC claims for the third or fourth quarters of 2021 that were filed after January 31, 2024, will be allowed if filed after the law’s passage—even if the taxpayer otherwise qualifies. The change effectively eliminates new refund claims for those periods and marks an enforcement shift.

Taxpayers who filed ERC claims before the cutoff remain eligible for review and appeal if the IRS disallows their credit. For those who can appeal once credit claims have been disallowed, the agency will issue Letter 105-C, Claim Disallowed, with appeal rights through the IRS Independent Office of Appeals.

The bill renewed several expiring provisions of the Tax Cuts and Jobs Act of 2017; authorized a $5 trillion increase in the national debt limit; and made several cuts to federal benefits.