Tax Reform Bill May Affect Employee Retention Tax Credit Claims

 Posted on May 23, 2025 in Taxation Law

For many businesses in the United States, keeping up with changes to tax laws can be a complex matter. Different types of tax credits may be available to certain taxpayers, but claiming improper credits could lead to penalties. One issue that has gained attention recently is the Employee Retention Tax Credit (ERTC). A proposed change to the law may affect businesses that have outstanding ERTC claims, and it may also increase the window of time in which the IRS can perform tax audits related to these claims.

Because of the changes that may be made to tax laws, businesses and other taxpayers may need legal help as they determine how to respond to IRS audits, whether they are eligible for certain credits, and how they can avoid or minimize penalties. A skilled attorney who has a strong understanding of these laws can provide guidance and legal representation, working to ensure that taxpayers can minimize their tax burdens.

ERTC Claims May Be Invalidated

The Employee Retention Tax Credit was created during the COVID-19 pandemic. Employers were allowed to claim refundable tax credits for up to 50% of qualified employee wages in 2020, up to a maximum of $5,000 per employee. This credit was also available during the first three quarters of 2021, allowing employers to claim a credit of up to 70% of qualifying wages, up to a maximum of $10,000 per employee.

The ERTC could only be claimed during the tax years of 2020 and 2021, and many businesses have filed claims seeking refunds for taxes paid during those years. The IRS has also allowed retroactive claims to be filed. The deadline for filing claims for 2020 was April 15, 2024, and the deadline for filing claims for 2021 was April 15, 2025. However the tax reform bill that was recently passed by the U.S. House of Representatives would invalidate all claims filed after January 31, 2024.

Even though millions of taxpayers have followed the IRS’s instructions and filed claims within the proper time limits, these claims may be denied, and the IRS may "claw back" refunds that have been paid out. The bill also extends the statute of limitations for audits of ERTC claims. Instead of the standard 3-year time limit, the IRS would have 6 years to review claims and initiate audits, and it may take action to deny claims, issue penalties, or impose clawbacks.

New Penalties for COVID-ERTC Promoters

When reviewing ERTC claims, the IRS has targeted accountants, tax preparers, and attorneys who have encouraged taxpayers to file improper claims. Penalties may be imposed for promoters who assist with filing ERTC claims and charge fees based on the amount of refunds that taxpayers receive. Under the law passed by the House of Representatives, promoters may face penalties based on fraudulent claims filed after March 12, 2020. These penalties may include:

• $200,000 per violation or 75% of the gross income a promoter earned from a claim, whichever is larger

• $1,000 per violation for a promoter’s failure to perform due diligence when determining whether a taxpayer was eligible for ERTC

• Up to $200,000 per violation for failing to disclose reportable ERTC transactions to the IRS, plus $10,000 per day if a promoter failed to respond to a requests from the IRS to provide lists of clients who had claimed employee retention credits

Contact Our San Jose, CA Tax Law Attorney

If the new law is passed, businesses that have filed claims for tax credits may face tax audits, and their claims could be denied, or they could even be required to return tax refunds that they have received. Because of the uncertainty surrounding these issues, it is important to consult with an attorney who can provide guidance on what steps taxpayers can take to protect themselves.

At John D. Teter Law Offices, our San Jose tax lawyer can help determine how to respond to tax audits and what steps can be taken to minimize penalties or clawbacks. We can also assist with withdrawing claims when necessary. To get legal help with these issues, contact us at 408-866-1810 and arrange a consultation.