IRS FAQs Clarify OBBBA Limitation on Certain Employee Retention Credit Claims

(Parker Tax Publishing November 2025)

The IRS issued frequently asked questions (FAQs) about the limitation on credits and refunds for employee retention credits claimed for the third and fourth quarters of 2021 filed after January 31, 2024, which was enacted by Section 70605(d) of the One Big Beautiful Bill Act. Among other items, the FAQs clarify that this limitation does not apply to claims filed after January 31, 2024, that were refunded or credited before July 4, 2025. FS-2025-07.

The One, Big, Beautiful Bill Act (OBBBA) introduced new enforcement provisions aecting the employee retention credit (ERC). One of these provisions, Section 70605(d) of the OBBBA, prevents the IRS from allowing or refunding ERCs after July 4, 2025, for the third and fourth quarters of 2021 if those claims were filed after January 31, 2024, even if a taxpayer otherwise met eligibility requirements. Other parts of the bill strengthen compliance enforcement by imposing penalties on certain promoters of the ERC who fail to meet due diligence requirements when assisting with certain credit claims.

In FS-2025-07, the IRS provided answers to frequently asked questions (FAQs) about the limitation on credits and refunds for ERCs claimed for the third and fourth quarters of 2021 filed after January 31, 2024. A taxpayer who reasonably and in good faith relies on the FAQs will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax.

The FAQs make the following clarifications:

Section 70605(d) of the OBBBA limits only new ERC claims filed after January 31, 2024.

Section 70605(d) does not apply to a taxpayer that filed a return claiming an ERC for the third or fourth quarter of 2021 after January 31, 2024, and received a refund or credit before July 4, 2025. However, other IRS compliance activities may still result in an adjustment or bill.

If a taxpayer claimed an ERC for the third or fourth quarter of 2021 on or before January 31, 2024, and then filed an amended return withdrawing the claimed ERC after January 31, 2024, for the same period, Section 70605(d) does not apply to the amended return. Accordingly, the IRS will process the taxpayer's return withdrawing the claimed ERC.

A taxpayer who missed the January 31, 2024, deadline cannot still file a return claiming an ERC for the third or fourth quarter of 2021. Under Section 70605(d), effective July 4, no new ERCs claimed on a return for those periods will be allowed or refund if filed after the January 31, 2024, deadline.

For purposes of Section 70605(d), an original or amended return claiming a refund based on an ERC is treated as filed on or before January 31, 2024, if the claim was postmarked and properly mailed or submitted to the appropriate IRS office by that date.

If an ERC claimed on a return is limited by Section 70605(d), the IRS can continue processing the return if the disallowed ERC claim is just one among other items the taxpayer claimed on the return.

Appeals rights are available if an ERC claim is disallowed. The taxpayer will receive a Letter 105-C, Claim Disallowed, and the taxpayer may appeal to the IRS Independent Office of Appeals if the taxpayer believes that the refund claim reporting ERC eligibility was timely filed on or before January 31, 2024, and the IRS improperly disallowed it under Section 70605(d).

For a discussion of the cessation of refunds for ERC claims filed after January 31, 2024, see Parker Tax ¶106,460.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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