Are Employee Retention Credit Refunds at Risk Under Trump's Tax Agenda?
Trump's new legislation will bar many small-to-mid-size businesses from claiming the pandemic-era ERC.
If your claim for the Employee Retention Tax Credit (ERTC) is still pending, the Trump administration’s newly enacted tax cuts and spending legislation contains some provisions that may impact you.
The so-called ‘One Big Beautiful Bill’ disallows all pending ERC claims submitted after January 31, 2024, these are claims related to the third and fourth quarter of 2021.
Taxpayers who already received an ERC refund for this period, or filed ERC claims before January 31, 2024, won’t be impacted by the new law. That’s a step back from previous versions of the megabill, which aimed to disallow all ERC claims filed after January 31, 2024 — including those claimed.
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Other major provisions affect pending ERC claims, including a prolonged audit window for claims submitted during Q3 and Q4 2021. There are also new and expanded penalties for advisors and promoters of the credit who failed to meet due diligence.
Here's how the Trump administration reshaped how the ERC works moving forward.
The problem with ERC refunds
The controversial employee retention tax credit was designed to help businesses retain employees during the COVID-19 pandemic. But certain promoters and tax preparers misled many businesses into engaging in fraudulent ERC practices.
The actions of these predatory ERC promoters led to a significant rise in improper ERC claims.
Since then, the IRS has paused and unpaused the program and dealt with major processing delays and lawsuits regarding the tax break. As reported by Kiplinger, staffing shortages due to the Trump administration’s shrinking of IRS workforce may also cause further delays on pending claims.
So, where does the IRS stand with pending ERC claims?
- As of April 15, 2025, the window for filing ERC claims officially closed.
- The Taxpayer Advocate, a government watchdog for the IRS, registered 597,000 unprocessed claims as of the spring. Thousands of disallowance notices were already issued.
- Trump’s new law will effectively disallow claims filed after January 31, 2024, with the exception of claims that have been paid.
Trump enacts major changes to ERC
Supporters of Trump’s ‘One Big Beautiful Bill’ argue that provisions to the tax code are designed to curb fraud, abuse, and wasteful spending in part by redirecting funds from the Employee Retention Tax Credit to other tax breaks.
The megabill implements three new provisions that impact the Employee Retention Tax Credit. These major changes include:
- Retroactively terminating all ERC refund claims filed after January 31, 2024.
- Extending the auditing period for the IRS to scrutinize ERC claims filed during Q3 and Q4 2021, for six years after the claim date.
- Cracking down on promoters who prepared claims without due diligence by adding new penalties.
As noted, these provisions do not apply to ERC claims for 2020 or the first and second quarter of 2021.
New Employee Retention Tax Credit rules
Millions of taxpayers could be denied an Employee Retention Tax Credit under the GOP's proposed tax legislation.
The OBBB implements three major changes to the Employee Retention Tax Credit and who may be able to claim the tax break moving forward. Let’s dive into what each of these provisions could mean for you.
1. Limitation on credits and refunds
The new law invalidates all ERC claims filed after January 31, 2024, regardless of their statutory deadlines. The final deadline to apply for the credit was April 15, 2025, for 2021 tax periods. The retroactive disallowance will impacted millions of taxpayers with pending cases.
2. Extension of limitations on assessment
Another provision tucked away in the bill extends the statute of limitations concerning the Employee Retention Credit. The IRS now has six years to audit ERC claims, giving the IRS additional time to make adjustments or denials.
In other words, the IRS can audit pending ERC claims as late as January 31, 2030, for claims filed on the January 31, 2024, deadline. The extended statute of limitations applies only to ERC claims for the third and fourth quarters of 2021.
3. Enforcing new penalties on promoters
Finally, the GOP tax bill adds new penalties targeting “COVID-ERTC” promoters. Those are individuals who provide aid, assistance, or advice concerning the credit, charge contingency fees, or receive significant revenue from said services.
Additionally, the promoter (including promoter firms) must have made at least 20% to 50% of their taxable income based on fees charged from clients respective ERC claims.
The new penalty applies to “any COVID-ERTC promoter” who assisted with ERC refund claims during the third and fourth quarters of 2021, and consists of:
- A $1,000 penalty per violation for failing to meet ‘due diligence’ requirements in determining ERTC eligibility.
- There is still pending guidance related on the enforcement of this penalty, as the IRS has yet to provide an exact definition of meeting ‘due diligence’ standards related to ERTC promoters.
Provisions could present constitutional challenges
According to a study from the Bipartisan Policy Center, the proposed reforms to the Employee Retention Tax Credit, along with other cuts to programs like the EITC, could have yielded over $123 billion over a decade.
However, the retroactive legislation would invalidate millions of pending claims made in good faith by businesses and nonprofits that complied with requirements during a period of financial struggle. Blocking the credit could also result in significant financial hardship for some businesses that anticipated receiving the credit.
An analysis of one of the early versions of the megabill by global law firm Eversheds Sutherland LLP noted that disallowing the ERC for some taxpayers retroactively could be problematic.
“Given the Congressional history of inducing taxpayers to claim the ERTC and the IRS’ large number of unprocessed claims, the proposed legislation appears ripe for constitutional challenge,” the publication co-authored by Cassandra Bradford and Joseph O’Brien noted of the initial draft.
Employee Retention Credit: What’s next
The ERC has had a troublesome history, and these new provisions could add some challenges for taxpayers with pending claims.
As reported by Kiplinger, the Trump administration’s efforts to shave down the IRS could also mean that those outstanding ERC claims could face further delays. As of the spring, the agency still faced a backlog of nearly half a million ERC claims, with many pending for more than a year.
Stay tuned for more information on the ERC, as this is developing news.
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