The House today passed the Senate-passed version of the One Big Beautiful Bill Act (H.R. 1) (“OBBBA”), which includes a number of major tax provisions, including a number of provisions that would affect withholding and information reporting obligations (see prior coverage here, here, here, here, here, and here—note that earlier coverage of some other provisions in the original House bill were dropped or modified from the legislation that was ultimately enacted).
One provision that was in the original House-proposed legislation but then removed before it passed the House found its way back into the final legislation that ultimately passed the House and Senate. Section 112205 of OBBBA includes enforcement provisions related to COVID-Related Employee Retention Credits. That credit was originally enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 and then extended and expanded in 2021. The credit, which was modeled on a credit previously used for physical disasters such as hurricanes and wildfires, was intended to cover a portion of employer’s payroll costs to encourage them to keep employees on payroll and was similar to programs enacted in other countries during the COVID-19 pandemic.
Unfortunately, the credit became mired in IRS delays as the IRS struggled to process the influx of claims amid staffing shortages of its own. The IRS released guidance in the form of FAQs, which this blogged detailed, and then later in more formal notices, which became more restrictive over time. (See our earlier three-part series on IRS guidance: here, here, and here.) In the face of this guidance, a cottage industry began advising employers on the credit, some of whom took increasingly aggressive positions in the view of the IRS—and in the views of some tax professionals. Section 112205 of OBBBA is a response to those perceived abuses.
OBBBA (1) retroactively suspends some pending claims for the employee retention credit; (2) extends the limitation period on assessments for some employee retention credit claims; (3) extends the penalty on excess refunds to employment taxes; and (4) adds a new of enforcement provisions targeting “COVID-ERTC Promoters.”
Retroactive Suspension of Pending Claims
The legislation suspends claims for the employee retention credit filed under section 3134 of the Code after January 31, 2024. This includes only employee retention credits for the third quarter of 2021 (and the fourth quarter of 2021 for recovery startup businesses). (The original House proposal would have retroactively suspended all pending claims filed after January 31, 2024, and not just those for the third and fourth quarters of 2021.) However, this provision is effective only for “credits and refunds allowed or made after the date of the enactment of” OBBBA. Accordingly, if an employer filed an ERC claim after January 31, 2024, but before the statute of limitations expired on April 15, 2025, and that claim has already been paid, this provision is not effective with respect to the taxpayer. The retroactive nature of the provision coupled with an effective date that turns entirely on whether the IRS has processed the employer’s timely filed refund claim creates an odd situation in which two taxpayers equally entitled to the credit at the time a claim was filed may end up in different circumstances based solely on IRS processing delays. Given the IRS’s unilateral imposition of a lengthy moratorium on ERC claim processing, this provision could affect taxpayers who were legitimately entitled to a credit when they filed a claim. Perhaps, the silver lining is that by limiting the suspension to the third and fourth quarters of 2021, the suspension will affect fewer employers compared to earlier quarters.
Extension of Statute of Limitations
Under current law, the statute of limitations on assessments with respect to employee retention credit claims filed for 2020 expired on April 15, 2024. The statute of limitations on assessments with respect to employee retention credit claims for the first two quarters of 2021 expired on April 15, 2025. The statute of limitations on assessments with respect to employee retention credit claims for the first two quarters of 2021 expired on April 15, 2025. Section 3134 provides an extended statute of limitations on assessment with respect to the last two quarters of 2021 that will not expire until April 15, 2027. (All of these statute expiration dates assume that an employer filed the Forms 941 for the applicable quarter on-time, or at least before April 15 of the following calendar year).
The legislation provides a further extended statute of limitations with respect to employee retention credit claims under section 3134. This extends the statute of limitation only for employee retention credit claims for the third and fourth quarter of 2021. (In contrast, the provision in the original House bill would have retroactively extended the closed statute of limitation for all employee retention credit claims.) The extended statute of limitations would generally expire on April 15, 2028, or six years from the date on which the claim for credit or refunds was filed, if later. Again, this assumes that the original Form 941 for the quarter was filed no later than April 15, 2022.
The legislation also extends the statute of limitations related to credits or refunds of income tax attributable to wages, which were not claimed as a deduction due to a section 3134 ERC claim that is subsequently disallowed until such time as the limitation period for assessments on the section 3134 ERC refund claim expires. The legislation does not extend the statute of limitations on assessments for wage deductions that were erroneously claimed that should not have been because the employer claimed the ERC with respect to such wages.
Penalty for Erroneous Refund
The legislation amends section 6676 of the Code to apply the 20% penalty for erroneous refunds to erroneous refunds of employment taxes unless it is shown that the erroneous refund was due to reasonable cause. Previously, section 6676 applied only to erroneous refunds of income taxes. The penalty is equal to 20% of the excessive amount.
COVID-ERTC Promoter Enforcement Provisions
Increased Assessable Penalty. First, the legislation increases the assessable penalty under section 6701(a)(1) of the Code for “COVID-ERTC Promoters” equal to the greater of $200,000 ($10,000 in the case of an individual) or 75% of the gross income derived from (or to be derived) by an COVID-ERTC Promoter with respect to aid, assistance, or advice with respect to any COVID-ERTC document that constitutes, or relates to, a return or a claim for a refund. The legislation provides that an COVID-ERTC Promoter generally must satisfy due diligence requirements similar to those under section 6695(g) of the Code (due diligence standards set by the Secretary for filing as Head of Household or claiming the Child Tax Credit, American Opportunity Tax Credit, and Earned Income Tax Credit) or will be deemed to satisfy the knowledge requirement under section 6701(a)(3) for the penalty to apply.
Due Diligence Penalty. Each failure to comply with the due diligence standards adopted by the Secretary pursuant to the legislation’s direction to adopt standards similar to those under section 6695(g) of the Code is subject to an assessable penalty of $1,000.
Reportable Transaction. Second, the legislation makes any COVID-Related Employee Retention Credit a listed transaction (and a reportable transaction) whether or not the employer claims such credit and makes ERTC-Promoters material advisors with respect to such transactions. As a result, COVID-ERTC Promoters will be required to report information regarding the ERC claims upon which they advised to the IRS.
COVID-ERTC Promoters. In general, the legislation defines COVID-ERTC Promoters to include any person who provides aid, assistance, or advice with respect to a COVID-ERTC Document, provided that person satisfies one of two tests. Under the first test, the person must charge or receive a fee based on the amount of the refund or credit with respect to such advice is given and with respect to the person’s taxable year in which such person provided assistance (or the preceding taxable year), more than 20 percent of the person’s gross receipts must be attributable to providing aid, assistance, or advice with respect to COVID-ERTC Documents. Under the second test, the person’s fee is not required to be based on the amount of the refund or credit. However, for the person’s taxable year in which the advice was provided (or the preceding taxable year), the aggregate fees for advice provided with respect to COVID-ERTC Documents must exceed 50% of the person’s total gross receipts or must exceed both 20% of the person’s total gross receipts and $500,000. For purposes of applying the $500,000 test, the aggregation rules under section 52 (for the Work Opportunity Credit) and section 414(m) and (o) apply. The legislation specifically excludes certified professional employer organizations under section 7705 of the Code from the definition of COVID-ERTC Promoter.
COVID-ERTC Document. The legislation defines COVID-ERTC Document to include any return, affidavit, claim, or other document related to any COVID-related employee retention tax credit, including any document related to eligibility for, or the calculation or determination of any amount directly related to any COVID-related employee retention tax credit.
Effective Dates. The penalty is effective retroactively to March 12, 2020, however the due diligence provisions are effective with respect to aid, assistance, and advice provided after the date of enactment of OBBBA.