OBBB Changes to ERC Claims: New IRS FAQ Provide Some Clarity

The newly released IRS FAQ confirm that taxpayers who have already received ERC-related refunds will not be required to repay those amounts even if their claim was filed after January 31, 2024, yet refunded before July 4, 2025. However, the IRS was clear to note that additional IRS compliance-related activities could result in an adjustment or a tax bill.

Amended returns that also included non-ERC related issues will continue to be processed to resolve those non-ERC issues even if the amended return also claims the ERC for the third or fourth quarter of 2021, and the amended return was filed after the deadline. The same is true for amended returns that originally included now-prohibited ERC claims if the taxpayer later withdrew the prohibited ERC claim.

For purposes of determining whether an amended return was filed before or after the January 31, 2024 deadline, a return is considered "filed" on or before January 31, 2024, if the claim was postmarked and properly mailed or submitted to the proper IRS office by that date.

The IRS also reminded taxpayers that an appeals process exists via the IRS Independent Office of Appeals and taxpayers will receive Letter 105-C, Claim Disallowed, if their ERC claim is denied.

ERC Controversy: Background

It may be helpful to understand the impetus behind the OBBB changes to the COVID-era tax credit.

According to an IRS release put out in mid-2024, the IRS had by that point digitized information and analyzed data related to over one million ERC claims. Somewhere between 10% and 20% of all claims analyzed displayed clear signs of being erroneous and improper. Based on those results, the IRS

announced that it planned to deny tens of thousands of improper ERC claims (worth billions of dollars) and also start processing lower risk claims that did not contain any red flags.

The IRS also created a voluntary withdrawal program to allow taxpayers who later believed their ERC claims to be false to withdraw those erroneous claims voluntarily. When businesses used the withdrawal process, the IRS treated the ERC claim as though it had never been filed—meaning that the IRS did not assess interest or civil penalties. However, taxpayers who willfully filed fraudulent claims or assisted in fraudulent claims may still be subject to criminal investigations even if they withdrew the claim.

All of this resulted in significant expenditures of resources as the IRS dedicated additional personnel and slowed the pace at which they reviewed claims to locate erroneous and fraudulent claims.

Taxpayers who filed erroneous ERC claims shouldn’t now believe that they’re off the hook. There is a special limitations period for the third quarter of 2021. That statute of limitations does not expire until the later of (1) April 15, 2028, or (2) six years from the date the ERC was claimed under the OBBB. Taxpayers who received ERC refunds should also be aware that the IRS can challenge the payment in court within two years of the date the refund was paid (five years if the taxpayer obtained the refund based on fraud or misrepresentation).

The OBBB also clarified that the 20% penalty for erroneous refunds covers both payroll tax returns and income tax returns.

Conclusion

Taxpayers with legitimate ERC claims should understand that those claims will now be denied if they were filed after January 31, 2024 (and related to the third or fourth quarters of 2021). However, those with legitimate claims that aren’t subject to the new rule retain the right to appeal if the legitimate claim was denied. Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.