By Marcus J. Brooks, Aaron Pinegar, & Ashley P. Withers

Many ERC claimants are breathing a sigh of relief given the much toned-down version of the changes to the ERC enacted on July 4, 2025. As enacted, the One Big Beautiful Bill Act (the “OBBBA”) disallows all pending ERC claims submitted after January 31, 2024, related to the third and fourth quarter of 2021 only. Taxpayers that have already received their ERC refunds for the third and fourth quarter 2021 or filed such ERC claims prior to January 31, 2024, remain unaffected. As compared to a former version of the OBBBA, which threatened to disallow all ERC claims filed after January 31, 2024, the OBBBA’s limited disallowance is expected to impact a much smaller scope of ERC claimants.

However, ERC claimants now bear a longer timeframe for a possible IRS audit or other enforcement efforts as the OBBBA extends the statute of limitations to six years (normally three years). As a bit of reprieve, Taxpayers’ ability to claim a wage deduction on their income tax return for the same period in which an ERC is disallowed is also extended to six years.

Finally, the OBBBA expands the IRS’s arsenal of available penalties, as applied to improper ERC claims, to include a 20% penalty for an erroneous claim for refund or credit (previously only applied to income tax) and certain due diligence requirements imposed on ERC promoters when determining taxpayer eligibility or the ERC amount claimed (or else face a $1,000 penalty for each failure to comply). Notably, professional employer organizations are excluded from such requirements.

Overall, the OBBBA left intact most existing ERC claims. However, ERC claimants, underwriters, and buyers that acquired an ERC claimant business may need to reassess their risk profile in light of the IRS’s expanded statute of limitations and penalties. To discuss potential risks to your business given the recent ERC changes, please contact Marcus J. Brooks, Aaron Pinegar, or Ashley P. Withers.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice. For more information, please contact a member of the Tax practice.

Meet Marcus

Marcus J. Brooks practice focusing on tax controversy and litigation. He represents clients in income and transfer tax matters during audits, before the IRS Appeals Office, and in federal and state courts. He advises on federal and state tax issues related to business transactions and compliance, serving private and public companies, investment funds, estates, and individuals. His broad expertise covers partnership, corporate, and international tax, as well as transfer pricing and state tax issues. Marcus frequently acts as outside general counsel, providing strategic advice on complex business and legal matters.

Meet Aaron

Aaron P. Pinegar concentrates his practice on U.S. federal income tax structuring and planning for a wide range of business transactions, including domestic and international mergers, acquisitions, divestitures, joint ventures, tax-free reorganizations, spin-offs, tax-deferred rollovers, financings, and restructurings. In addition, transactional lawyers and law firms across the country regularly engage Aaron to serve as outside tax co-counsel on matters for their clients.

Meet Ashley

Ashley P. Withers helps businesses and taxpayers with federal tax matters that impact their lives. In her tax controversy practice, she has successfully defended clients in IRS audits and appeals and secured favorable private letter rulings. Most recently, she secured a finding of “no deficiency” for an employer undergoing a complex employee retention credit (ERC) tax audit involving a potential $1 million+ tax liability. In her transactional practice, she helps buyers and sellers think through how to appropriately address pre- and post-closing tax liabilities, including potential ERC liabilities.