Claim cutoffs and extended time for IRS review of Q3 and Q4 2021
Congress’ preliminary legislative drafts proposed denying all ERTC claims filed after Jan. 31, 2024, as well as significantly expanding the statute of limitations (the period of time during which the IRS could adjust ERTC claims already paid); however, the final OBBBA limited these changes to ERTC claims for the third and fourth quarters of 2021. Since few employers were eligible to claim ERTC for Q4 2021, the new limitations will likely only impact Q3 2021 for most ERTC claimants.
Under the new legislation, the IRS will automatically deny any Q3 or Q4 2021 claims for ERTC filed after Jan. 31, 2024. However, the effective date of this provision is with regard to credits and refunds allowed or made after the date of enactment of OBBBA, so any ERTC refunds for Q3 and Q4 2021 filed after Jan. 31, 2024 that have already been refunded are unlikely to be impacted. Businesses with pending valid ERTC claims for other eligible periods, or whose claims were filed before Jan. 31, 2024, do not need to worry about their refunds being denied under this provision.
The new legislation also gives the IRS significantly more time to review ERTC claims that have already been paid, but again, this expansion applies only to Q3 and Q4 2021.
The standard period during which the IRS can make additional assessments to a tax return is three years from the deemed or actual filing date, whichever is later. For Forms 941, the quarterly returns are deemed filed on April 15 of the year following the year of the returns. For ERTC claims, most statutes of limitations on assessment have already expired, with 2020 claims expiring on April 15, 2024 and 2021 claims for Q1 and Q2 expiring on April 15, 2025.
These dates also represent the closing of the period during which taxpayers could file claims for refund on these quarters. Under the American Rescue Plan Act of 2021 (ARPA) that passed in March of that year, the statute of limitations for ERTC claims for Q3 and Q4 of 2021 had already been extended from the usual three (3) years up to five (5) years from the date of filing.
The OBBBA expanded the statute of limitations on assessment to six years, but unlike most statutes of limitations, this expansion is calculated from whichever of the following is latest:
- The original quarterly return due date
- The original return filing date
- The date on which the ERTC claim was filed
There is no similar expansion of the period during which taxpayers can claim refunds.
Even the additional year on the statute of limitations clock provided under the ARPA rules could be impactful for the IRS’s ability to counter inaccurate ERTC claims, but the OBBBA change may be more significant by starting the statute of limitations as of the date of the ERTC claim filing rather than the return filing date.
Considering that a valid ERTC claim for Q3 or Q4 of 2021 could be filed as late as Jan. 31, 2024 (assuming all other requirements are met), the IRS will now be able to review that ERTC claim for potential errors as late as early 2030.
ERTC claimants that are still waiting for their claims to be processed are less impacted by the statute of limitations on assessment extension. As long as the ERTC claim has not been processed and paid, there is no statutory time pressure on the IRS to process and pay the refund unless the claimant pursues a refund case in court. Claimants who have been waiting for an excessive timeframe to receive their refund may want to discuss with their tax advisor whether to request assistance from the Taxpayer Advocate Service.
Erroneous refund penalty expanded to employment tax liabilities
Enacted in 2007, the erroneous refund penalty under section 6676 is a 20% penalty imposed on excessive refund claims. By its plain language, this penalty only applied to claims for refund or credit with respect to income tax, so the penalty was not available to penalize taxpayers for making improper or excessive claims for ERTC. This gap likely led to the inclusion in OBBBA of an expansion of the penalty.
Under the OBBBA, the IRS is now allowed to apply section 6676 to claims for refund or credit against both income and employment tax. This expansion only applies to claims for credit or refund after July 4, 2025, however, so it will not impact ERTC claims.
Employers who claim other credits on Forms 941, such as the research and development (R&D) credit for qualified small businesses or exempt organizations that claim work opportunity credits (WOTC) against employment taxes, could be subject to this penalty on excessive claims.
Increased promoter penalties
The last major ERTC-related provision relates to increased penalties assessable against “COVID-ERTC Promoters,” a newly created category.
The OBBBA defines a COVID-ERTC Promoter as an individual or business “which provides aid, assistance, or advice with respect to [the ERTC],” charged a fee “based on the amount of the refund,” and such fees from ERTC claims constitute a sufficiently high percentage of the promoter’s annual gross receipts (in aggregate) (under any of several different tests that the IRS can apply). Certified professional employer organizations (CPEOs) are specifically exempted from this definition.
An individual or business who meets the definition as a COVID-ERTC promoter and is determined not to have met due diligence requirements with respect to its ERTC claim assistance may be subject to penalties of $1,000 for each failure.
Because the ERTC is claimed on a quarterly basis, it is possible that the penalty could be assessed for each erroneous quarter, rather than by the client or project, potentially leading to steep fines for some of the more profligate promoters.
However, this section of the OBBBA directs these penalties to be treated as being imposed under section 6695, which limits the amount of preparation-related penalties to no more than $25,000 per year; it is possible that the same cap may apply for COVID-ERTC promoter penalties.
Like the other ERTC provisions in OBBBA, its impact may be minimal because this penalty only applies to aid, assistance, or advice provided on or after July 5, 2025, well after the periods for filing ERTC claims have closed, though there are some instances in which these businesses may still be providing assistance, such as in mergers and acquisitions transactions.
While this is an important step in helping the IRS crack down on such preparers, this is specifically a civil penalty that the IRS can apply. It does not create a private cause of action that businesses could assert against a promoter, even in cases of scams. However, the most recent IRS Frequently Asked Questions (FAQs) page relating to ERTC does provide an option for taxpayers to report suspected abusive tax promotions or preparers using Form 14242.
RSM takeaways: ERTC enforcement and the OBBBA
While OBBA did make several significant changes to related to ERTC and employment taxes, the impact of these changes may be minimal because they are limited to specific quarters (Q3 and Q4 2021) or not applicable until after the date of OBBBA enactment on July 4, 2025.
ERTC claimants who are still waiting on IRS to process their claims or who receive notices from the IRS requesting additional information or proposing changes to their ERTC claims should consult with a trusted tax advisor to ensure any responses are complete and effective.
