Are Employee Retention Credit Refunds at Risk Under the GOP Tax Bill?

Employee retention tax credit papers and folder.

(Image credit: Getty Images)

last updated 17 June 2025

Republicans in the U.S. House of Representatives recently passed their version of President Donald Trump’s sweeping tax overhaul and spending cuts bill. The bill is now being considered by the U.S. Senate, but a controversial provision in the House version sought to terminate the Employee Retention Tax Credit (ERTC) retroactively.

If approved, the measure would have jeopardized an estimated $50 million in refunds for small businesses and nonprofits nationwide.

Tax advocacy group, Joseph Holdings, was reportedly prepared to engage the Trump administration and urge Congress to remove the ERC rollback, while legal groups flagged constitutional challenges tied to the provisions.

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The repeal, which has since been struck from the legislation via House Resolution 492, would likely have invalidated an estimated 1 million ERC refund requests pending at the IRS.

Here's more of what you need to know.

ERC refunds initially at risk in House GOP bill

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.

Since then, the IRS has paused and unpaused the program and dealt with major processing delays and lawsuits regarding the tax break.

It should be noted that Trump’s newly confirmed IRS commissioner, Billy Long, has faced questions about his qualifications to lead the agency in part due to the ERC.

Sen. Elizabeth Warren (D-Mass) and others expressed concern over Long having allegedly pushed the “fraud-ridden” tax credit and misleading taxpayers into believing everyone qualified.

For taxpayers who still have pending ERC cases, the proposed legislation initially raised concerns about fair treatment as they filed in good faith by the IRS deadline. Some businesses would have faced serious financial setbacks if they couldn’t recover those funds.

“These entities — many of which are still struggling post-pandemic— need their pending ERTC refunds to remain operational,” Gabriel Joseph, CEO of Joseph Holdings, said.

GOP proposes, then removes major changes to ERC

Supporters say the proposed House GOP mega legislation is designed to curb fraud, abuse, and wasteful spending in part by redirecting funds from the Employee Retention Tax Credit to other tax breaks.

To start, House Republicans wanted to invalidate all ERC claims filed after January 31, 2024, regardless of their statutory deadlines. The final deadline to apply for the credit was April 15 for 2021 tax periods. The retroactive disallowance would have impacted millions of taxpayers with pending cases.

Another provision tucked away in the bill would have extended the statute of limitations concerning the credit. The IRS would have six years to audit ERC claims, giving the IRS additional time to make adjustments or denials.

Finally, the GOP tax bill would have placed 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.

The three new penalties proposed by House Republicans as part of Trump’s major tax breaks bill would have applied retroactively to March 12, 2020, and included:

A penalty equal to the greater of $200,000 per violation for businesses ($10,000 for individuals) or 75% of the promoter’s gross income from the claim.
A $1,000 penalty per violation for failing to meet due diligence requirements in determining ERTC eligibility.
Penalties as high as $200,000 for failure to comply and disclose listed (or reportable) transactions of clients concerning ERTC under Section 6111. A penalty of $10,000 will be imposed per day for failing to provide client lists upon request.

Provisions could present constitutional challenges

Cash and federal treasury check on wood countertop. — *Millions of taxpayers could be denied an Employee Retention Tax Credit under the GOP's proposed tax legislation.*

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.

The retroactive penalties placed on promoters, which include significant monetary fines, could violate due process protections under the Fifth Amendment if considered “harsh and oppressive,” an analysis by global law firm Eversheds Sutherland LLP noted.

“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

House Republicans passed the One Big Beautiful Act by a vote of 214-215. Now the legislation is in the Senate for consideration, where it's likely to undergo revisions.

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 last fall, the agency still faced a backlog of about 1.2 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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Gabriella Cruz-Martínez is a seasoned finance journalist with 8 years of experience covering consumer debt, economic policy, and tax. Before joining Kiplinger as a tax writer, her in-depth reporting and analysis were featured in Yahoo Finance. She contributed to national dialogues on fiscal responsibility, market trends and economic reforms involving family tax credits, housing accessibility, banking regulations, student loan debt, and inflation.

Gabriella’s work has also appeared in Money Magazine, The Hyde Park Herald, and the Journal Gazette & Times-Courier. As a reporter and journalist, she enjoys writing stories that empower people from diverse backgrounds about their finances no matter their stage in life.