The IRS released new guidance limiting Employee Retention Credits (ERC) for businesses that filed claims for the third and fourth quarters of 2021 after January 31, 2024. The guidance, outlined in Fact Sheet 2025-07, addresses restrictions enacted under recent legislation known as the One, Big, Beautiful Bill.

Under these new rules, businesses that submitted ERC claims for the latter half of 2021 after the January 31, 2024 deadline will see those claims disallowed, even if they fell within the original filing deadline of April 15, 2025. The IRS confirmed that employers whose claims are denied under these restrictions retain the standard right to appeal.

The Employee Retention Credit was a pandemic-era tax benefit designed to help businesses keep employees on payroll during COVID-19 disruptions. However, the program has faced significant scrutiny due to widespread fraud and improper claims, leading to enhanced IRS enforcement efforts.

“The FAQs discuss the limitation generally, when a claim is considered to be timely filed, and what appeal rights are available if an ERC claimed on a return is disallowed,” the IRS stated in its announcement.

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Extended Audit Window Creates Long-Term Risk

The One, Big, Beautiful Bill extended the statute of limitations for IRS examinations of ERC claims to six years from the filing date, replacing the usual three-year period measured from the end of the calendar year. This change significantly increases the time during which the agency can review prior filings for accuracy.

Tax professionals have noted that this extended audit period could expose some employers to additional scrutiny through the early 2030s for claims filed in 2021 and 2022. The IRS previously paused the processing of new ERC claims from September 2023 through at least August 2024 as part of a broader compliance initiative to address improper filings.

The agency has focused particularly on claims from businesses that did not exist during the claimed periods, had no employees, or failed to meet other basic eligibility requirements. According to the IRS, many of these improper claims were connected to high-risk third-party promoters that encouraged ineligible businesses to file.

What Businesses Need to Know

Common misconceptions about ERC eligibility continue to create problems for businesses. Supply chain disruptions alone do not qualify a business for the credit, and companies must have eligible wages and meet specific operational requirements during the claimed periods.

For businesses that properly claimed ERC credits before the January 31, 2024 deadline, the new restrictions do not affect their eligibility. However, the extended six-year audit window established under the One, Big, Beautiful Bill means maintaining complete and well-organized documentation remains essential for several more years.

The IRS guidance emphasizes that businesses must have supporting records for every aspect of their ERC claims. Companies that used third-party preparers or promoters should be especially careful to verify that their claims meet all eligibility requirements, since the business owner remains legally responsible for the accuracy of the filing, according to the IRS.

This latest guidance represents the IRS’s continued effort to address widespread fraud in the ERC program while providing clarity for legitimate claims. Businesses with questions about their ERC eligibility or facing potential audits should consult with qualified tax professionals to ensure compliance with the complex requirements.

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