IRS Guidance Implementing OBBBA ERC Rules

The OBBBA tightened the rules for the ERC with respect to the third and fourth quarter of 2021. The IRS recently released an FAQ to clarify the ERC OBBBA changes. Additionally, a recent IRS CCA clarifies the IRS’ position regarding how the rules for administrative adjustment requests (AARs) under the Bipartisan Budget Act of 2015 (BBA) regime could impact ERC claims.

Background

The ERC was an elective, refundable payroll tax credit designed for businesses that continued paying employees during the COVID-19 pandemic. An employer qualifying for the ERC generally paid employees while their business operations were fully or partially suspended due to a government order or had a significant decline in gross receipts during certain eligibility periods (generally from March 13, 2020, through the third quarter of 2021, although certain recovery startup businesses were eligible for the ERC in the fourth quarter of 2021).

Taxpayers that claimed the ERC generally also were required to reduce the amount of their wage expense by the claimed ERC amount on their corresponding federal income tax return, often by filing an amended income tax return and paying additional tax for the tax year or years for which the ERC was claimed. Under the BBA, a partnership cannot file an amended return but must file an administrative adjustment request (AAR) to adjust wages on a previously filed Form 1065, “U.S. Return of Partnership Income.”

Since the ERC’s inception, the IRS has received millions of ERC refund claims. But the IRS has engaged in rigorous review of ERC claims, slowing down the process for issuing refunds and disallowing a significant number of ERC claims. Additionally, the IRS has offered programs allowing taxpayers to withdraw or voluntarily disclose questionable ERC claims.

Crowe observation

While the ERC voluntary disclosure program closed in 2024, the ERC withdrawal program remains an option for eligible taxpayers.

In response to concerns raised by the IRS about invalid ERC claims, for the third and fourth quarter of 2021, the OBBBA extended the period for the IRS to claw back ERC refunds and limited ERC refunds that the IRS can issue.

FAQ on the OBBBA’s ERC changes

The deadline to claim an ERC refund for 2020 was April 15, 2024, and the deadline to claim an ERC refund for 2021 was April 15, 2025. Regardless of whether the claim was timely filed, the OBBBA prohibits the IRS from issuing a refund for the third and fourth quarters of 2021 if that claim is filed after Jan. 31, 2024, and the refund was not paid before July 4, 2025, the date of enactment of OBBBA.

The IRS FAQ clarifies the scope and timing of the OBBBA ERC changes. Among other things, the FAQ confirms that the OBBBA prohibition on the IRS issuing an ERC refund does not apply to amounts that were refunded before July 4, 2025. It also clarifies that a claim is considered filed on or before Jan. 31, 2024, if it was postmarked and properly mailed or submitted to the appropriate IRS office by that date.

Taxpayers receiving a refund claim disallowance via IRS Letter 105-C or a similar claim disallowance letter have the option to contest the disallowance. Under Section 6532, taxpayers have two years from the date of the claim disallowance letter to file suit in federal court. The FAQ clarifies that taxpayers also may appeal the disallowance to the IRS Independent Office of Appeals, but doing so does not stop the running of the two-year period to file suit in federal court.

The ERC and the BBA

Under Section 6227, an AAR cannot be filed after three years from the later of the date the return is filed or the unextended due date of the return. Furthermore, an AAR cannot be filed after a notice of administrative proceeding has been mailed.

The IRS released CCA 202538022, which generally provides that the IRS will not process an AAR filed after the Section 6227 deadline expires and that an AAR that is not signed by the partnership representative (or designated individual if applicable) is not valid. The CCA further provides that partnerships should refer to the recent FAQ generally allowing taxpayers to include ERC refunds in gross income in the year the refund is received rather than filing an AAR for the year to which the ERC refund relates if the partnership has not yet reduced its wage deduction for that year.

Looking ahead

The OBBBA ERC changes and the CCA have placed additional requirements and restrictions on certain refund claims related to the ERC. Taxpayers that have yet to receive already-filed ERC refund claims or that have not reduced wage deduction expenses should consult their tax adviser to determine whether these recent developments impact them and, if so, how best to proceed.