IRS Details New ERC Limits as Late 2021 Claims Are Barred and Audit Window Grows to Six Years

The Internal Revenue Service on Oct. 22 issued frequently asked questions on the Employee Retention Credit provisions of the One, Big, Beautiful Bill, the tax law signed July 4. The guidance confirms that credits for the third and fourth quarters of 2021 claimed after Jan. 31, 2024, will not be allowed or refunded if they were still unpaid when the law took effect. Together with a longer audit window written into the statute, it changes the risk picture for business owners who claimed pandemic-era payroll credits.

What changed

The core rule sits in section 70605(d) of Public Law 119-21. It says no credit under the ERC statute can be allowed, and no refund made, after the date of enactment unless the claim was filed on or before Jan. 31, 2024. The IRS fact sheet (FS-2025-07) applies that rule to the third and fourth quarters of 2021 and answers the practical questions:

• Only claims filed after Jan. 31, 2024, are limited. Earlier claims are not affected by this provision.
• A late claim that was already refunded or credited before July 4, 2025, is generally not clawed back under this rule, although other IRS compliance work could still produce an adjustment.
• No new claims for those quarters will be allowed if filed after the deadline.
• A claim counts as filed on time if it was postmarked and properly mailed, or submitted, by Jan. 31, 2024.
• An amended return withdrawing a credit will still be processed, and other items on a return with a disallowed credit can still be processed.
• Businesses whose claims are disallowed will receive Letter 105-C and can appeal to the IRS Independent Office of Appeals if they believe the claim was timely.

The statute goes further than the FAQs. It rewrites the ERC assessment rule so that the period for assessing any amount attributable to the credit does not expire before six years after the latest of the date the original return for the quarter was filed, the date it is treated as filed, or the date the claim for credit or refund was made. It also keeps open the time to claim back the related wage deduction when an improperly claimed credit is assessed.

Who is affected

Three groups should read the guidance closely. Owners whose late 2021 claims were still pending on July 4 are now looking at disallowance rather than a delayed check. Owners who received refunds on late or earlier claims face a longer period in which the IRS can examine eligibility. And advisers who marketed or prepared ERC claims face a new penalty regime.

That regime imposes a $1,000 penalty for each failure by a COVID-ERTC promoter to meet due diligence requirements similar to those that apply to paid preparers of certain credits. The law defines a promoter by the share of its business tied to ERC work: generally, a person charging fees based on the credit amount whose ERC-related gross receipts exceed 20% of total receipts, or a person whose ERC receipts exceed 50% of total receipts, or exceed both 20% of total receipts and $500,000. Certified professional employer organizations are excluded.

The after-tax math

Example 1: a professional practice filed amended payroll returns in March 2024 claiming $300,000 of credits for the third and fourth quarters of 2021. The refund had not arrived by July 4, 2025. Under section 70605(d), the IRS will not pay it. The owners' planning assumption shifts from a $300,000 inflow to zero, with appeal rights limited to arguing the claim was actually filed by Jan. 31, 2024.

Example 2: a manufacturer filed a $150,000 claim in December 2023 and received the refund in 2024. Section 70605(d) does not reach it. But the six-year rule means the IRS can assess amounts tied to that credit until at least December 2029. If the credit is later found improper, the business would owe the $150,000 back, potentially with interest and penalties, while the law preserves its ability to recover the wage deduction that was reduced when the credit was claimed.

Moves to discuss with your advisor

• Pulling filing records, postmarks or electronic submission confirmations for every ERC claim, since the Jan. 31, 2024, date now decides outcomes.
• Reviewing eligibility documentation for credits already received, with the six-year window in mind.
• For owners with doubts about a paid claim, discussing with a CPA or tax attorney whether withdrawal or other resolution options still fit their facts.
• Understanding how a disallowed credit interacts with previously reduced wage deductions on income tax returns.

What to watch

The IRS said the FAQs are not published in the Internal Revenue Bulletin and may be updated, although taxpayers who rely on them in good faith are protected from certain penalties. Watch for further guidance defining the promoter due diligence requirements, for the volume of Letter 105-C disallowances, and for appeals testing what counts as a timely filed claim.

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