As many as 80 million taxpayers may never get to cash out this promised pandemic-era tax credit.
House Republicans just passed their version of President Donald Trump’s sweeping tax overhaul and spending cuts bill, but a controversial provision seeks to terminate the Employee Retention Tax Credit (ERTC) retroactively. The measure would jeopardize an estimated $50 million in refunds for small businesses and nonprofits nationwide.
Tax advocacy group, Joseph Holdings, is preparing to engage the Trump administration and urge Congress to remove the ERC rollback, while legal groups have flagged constitutional challenges tied to the provisions. The repeal would likely invalidate an estimated 1 million ERC refund requests pending at the IRS.
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The controversial tax credit was designed to help businesses retain employees during the COVID-19 pandemic. But certain promoters and tax preparers misled many businesses to engage in fraudulent ERC practices. Since then, the IRS has paused and unpaused the program and dealt with major processing delays and lawsuits regarding the tax break.
It should be noted that Trump’s choice for IRS commissioner, Billy Long, is facing questions about his qualifications to lead the agency. Sen. Elizabeth Warren (D-Mass) and others expressed concern over Long having allegedly pushed the “fraud-ridden” tax credit and misleading taxpayers into believing everyone qualified.
For taxpayers who still have pending ERC cases, the proposed legislation raises concerns about fair treatment as they filed in good faith by the IRS deadline. Some businesses may face serious financial setbacks if they can’t recover those funds.
“These entities — many of which are still struggling post-pandemic— need their pending ERTC refunds to remain operational,” Gabriel Joseph, CEO of Joseph Holdings, said. “The pending rollback contradicts President Trump’s commitment to reducing taxes and supporting small businesses.”
Here’s what you need to know about the potential changes to the employee retention credit.
GOP proposes major changes to ERC
The proposed legislation aims to curb fraud, abuse, and wasteful spending by redirecting funds from the Employee Retention Tax Credit to other tax breaks.
To start, House Republicans want to invalidate all ERC claims filed after January 31, 2024, regardless of their statutory deadlines. The final deadline to apply for the credit was April 15 for 2021 tax periods. The retroactive disallowance would impact millions of taxpayers with pending cases.
Another provision tucked away in the bill would extend the statute of limitations concerning the credit. The IRS would have six years to audit ERC claims, giving the IRS additional time to make adjustments or denials.
Finally, the GOP tax bill would place penalties targeting “COVID-ERTC” promoters. Those are individuals who provide aid, assistance, or advice concerning the credit, charge contingency fees, or receive significant revenue from said services.
The three new penalties proposed by House Republicans as part of Trump’s major tax breaks bill would apply retroactively to March 12, 2020, and include:
- A penalty equal to the greater of $200,000 per violation for businesses ($10,000 for individuals) or 75% of the promoter’s gross income from the claim.
- A $1,000 penalty per violation for failing to meet due diligence requirements in determining ERTC eligibility.
- Penalties as high as $200,000 for failure to comply and disclose listed (or reportable) transactions of clients concerning ERTC under Section 6111. A penalty of $10,000 will be imposed per day for failing to provide client lists upon request.
Provisions could present constitutional challenges
Millions of taxpayers could be denied an Employee Retention Tax Credit under the GOP’s proposed tax legislation.
(Image credit: Getty Images)
According to a study from the Bipartisan Policy Center, the reforms to the Employee Retention Tax Credit, along with other cuts to programs like the EITC, would yield over $123 billion over a decade.
However, the retroactive legislation would invalidate millions of pending claims made in good faith by businesses and nonprofits that complied with requirements during a period of financial struggle. Blocking the credit could also result in significant financial hardship for some businesses that anticipated receiving the credit.
The retroactive penalties placed on promoters, which include significant monetary fines, could violate due process protections under the Fifth Amendment if considered “harsh and oppressive,” an analysis by global law firm Eversheds Sutherland LLP noted.
“Given the Congressional history of inducing taxpayers to claim the ERTC and the IRS’ large number of unprocessed claims, the proposed legislation appears ripe for constitutional challenge,” the publication co-authored by Cassandra Bradford and Joseph O’Brien noted.
Employee Retention Credit: What’s next
House Republicans passed the One Big Beautiful Act by a vote of 214-215. Now the legislation moves to the Senate for consideration, where it’s likely to undergo revisions.
As noted, legal firms have already cited concerns that the bill’s retroactive provisions regarding the ERC may present a constitutional challenge. Tax advocacy groups are also lobbying against the bill in Congress, as the changes to credits like the ERC could significantly harm struggling businesses that acted in good faith.
On Tuesday, Senate lawmakers questioned Trump’s pick for IRS Commissioner, former Missouri Congressman and auctioneer Billy Long. During the hearing, Sen. Ron Wyden (D- Ore.) pressed Long over his promotion of the employee retention tax credit.
“I didn’t say everyone qualifies,” Long said, defending his stance on the tax breaks. “I said virtually everyone qualifies.”
It’s unclear how Long may address the ERC in the future if confirmed as IRS Commissioner.
As reported by Kiplinger, the Trump administration’s efforts to shave down the IRS could also mean that those outstanding ERC claims could face further delays. As of last fall, the agency still faced a backlog of about 1.2 million ERC claims, with many pending for more than a year.
Stay tuned for more information on the ERC, as this is developing news.