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“Big, Beautiful Bill”: Federal Tax Bill Would Restrict the Employee Retention Credit

A sweeping federal tax bill that is currently under consideration in the US House of Representatives contains provisions that would significantly change the administration and enforcement of the Employee Retention Credit (ERC).

The ERC was enacted in 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial relief to businesses affected by the COVID-19 pandemic by incentivizing employers to retain employees on payroll and rehire displaced workers. The ERC allowed employers that experienced significant disruptions due to government orders or a substantial decline in gross receipts to claim a tax credit equal to a percentage of qualified wages paid to employees. Millions of employers have filed refund claims seeking ERC for periods in 2020 and 2021. Since the enactment of the CARES Act, the Internal Revenue Service (IRS) has issued roughly $250 billion in ERC. More than 500,000 claims remained pending as of April 2025.

The federal tax bill, dubbed the “Big, Beautiful Bill” by US President Donald Trump, would prevent the IRS from allowing ERC that was claimed by a taxpayer on or before January 31, 2024. The deadline to claim ERC for taxable quarters in 2020 was April 15, 2024, and the deadline to claim ERC for taxable quarters in 2021 was April 15, 2025. The tax bill would thus appear to render ineligible all pending claims that were made after January 31, 2024, which are likely to be considerable in number. The bill is ambiguous as to whether taxpayers who have already been allowed ERC would need to repay those amounts to the extent their claims were made after January 31, 2024.

The tax bill would also extend the statute of limitations on the IRS’s ability to assess amounts attributable to ERC. Presently, the IRS has three years to assess amounts associated with ERC for all periods in 2020 and for Q1 and Q2 of 2021. The IRS has five years to assess amounts associated with ERC for Q3 and Q4 of 2021. The proposed legislation would extend both of these limitations periods to six years. This change would be significant, especially because the IRS is authorized to assess and collect erroneously allowed ERC by notice and demand.

Practice Point: Taxpayers with pending ERC claims should be alert to ongoing legislative developments – as this area continues to be a prominent focus of federal tax policy – and prepare now to defend ERC claims (even those filed after the potentially new deadline of January 31, 2024). Enactment of the changes proposed in the tax bill could dramatically restrict the amount of ERC currently eligible to be paid or credited and may empower the IRS to recapture a greater amount of claims already allowed. But considerable uncertainties remain as to the scope of the changes proposed in the bill. In the face of this uncertainty, taxpayers should consult experienced counsel who can assist them in preparing to defend ERC claims to which they are entitled.




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The Employee Retention Credit: IRS’s “Risking” Model Faces Legal Challenge

Case: ERC Today LLC et al. v. John McInelly et al., No. 2:24-cv-03178 (D. Ariz.)

In an April 2025 order, the US District Court for the District of Arizona denied a motion for a preliminary injunction filed by two tax preparation firms. The firms sought to halt the Internal Revenue Service’s (IRS) use of an automated “risk assessment model” that the IRS used to evaluate and disallow claims for the Employee Retention Credit (ERC), seeking to restore individualized review of ERC claims.

BACKGROUND ON THE ERC

The ERC was enacted in 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial relief to businesses affected by COVID-19 by incentivizing employers to retain employees and rehire displaced workers. The ERC allowed employers that experienced significant disruptions due to government orders or a substantial decline in gross receipts to claim a tax credit equal to a percentage of qualified wages paid to employees. Millions of employers have filed amended employment tax returns (Form 941-X) claiming the credit for periods in 2020 and 2021. Since the enactment of the CARES Act, the IRS has issued roughly $250 billion in ERC.

THE IRS’S MORATORIUM AND AUTOMATED RISK ASSESSMENT MODEL

In September 2023, the IRS instituted a moratorium on processing ERC claims to review its procedures, reduce the backlog of claims, and identify potential fraud. Before the moratorium, all ERC claims received individualized review. During the moratorium, the IRS developed an automated “risk assessment model” to facilitate the processing of claims. This model, which is alternatively known as “risking,” utilizes taxpayer-submitted data and publicly available information to predict the likelihood that a taxpayer’s claim is valid or invalid. Claims deemed to be “high risk” by the system are excluded from review by an IRS employee and instead are designated for immediate disallowance. In August 2024, the IRS lifted its ERC processing moratorium and began issuing thousands of disallowance notices to taxpayers. Notwithstanding these actions, the number of pending ERC claims remained above one million as of November 2024.

THE COURT CHALLENGE TO THE IRS’S “RISKING” MODEL

In their motion for a preliminary injunction, filed January 7, 2025, the plaintiffs (the tax preparation firms) sought a court order compelling the IRS to, among other things, stop the use of “risking” and restore individualized employee review of ERC claims. The plaintiffs claimed to be injured by the “risking” model because they were unable to collect contingency fees from clients when claims were disallowed.

In support of their motion, the plaintiffs pointed to having received on behalf of their clients many boilerplate rejections immediately following the end of the moratorium. The plaintiffs alleged that these summary disallowances were arbitrary and capricious, thus violating the Administrative Procedure Act (APA), because the “risking” model precluded the IRS from acquiring information necessary to properly evaluate the claims.[1] The plaintiffs also contended that the disallowances reflected a shift in IRS policy to disfavor ERC, with the result being that several legitimate claims were being [...]

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Weekly IRS Roundup October 28 – November 1, 2024

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 28, 2024 – November 1, 2024.

October 28, 2024: The IRS released Internal Revenue Bulletin 2024-44, which includes the following:

  • Treasury Decision 9994, which provides guidance on § 367(d) of the Internal Revenue Code (Code) regarding the transfer of intangibles by US persons to foreign corporations. Effective January 1, 2024, the regulations turn off the application of § 367(d) when foreign corporations repatriate the intangibles to a qualified domestic person when certain reporting requirements are satisfied.
  • Notice 2024-71, which provides a safe harbor under Code § 213(d), treating amounts paid for condoms as medical care expenses eligible for reimbursement under various health plans. These amounts can also be paid or reimbursed, but if reimbursed, they are not deductible.
  • Notice 2024-75, which expands the list of preventive care benefits that high deductible health plans can provide without a deductible or with a lower deductible, including benefits for over-the-counter oral contraceptives and condoms, regardless of whether they are purchased with a prescription. The guidance is effective for plan years that began on or after December 30, 2022.
  • Revenue Procedure 2024-33, which updates the guidelines and general requirements for developing, printing, and approving substitute tax forms as detailed in Revenue Procedure 2023-28 to ensure submitted forms can be accepted as substitutes for official IRS forms.
  • Announcement 2024-36, which revokes the determination for specified organizations under Code § 501(c)(3) and stipulates that contributions made to said organizations by individual donors are no longer deductible under Code § 170(b)(1)(A).

October 28, 2024: The IRS reminded taxpayers to stay alert against online threats like identity theft and fraud. As National Cybersecurity Awareness Month concludes, the agency also offered tips, such as using strong passwords, enabling multifactor authentication, and avoiding phishing scams, to protect one’s personal information.

October 28, 2024: The IRS released Notice 2024-78, which extends the temporary relief provided in Notice 2023-11 for foreign financial institutions required to report US taxpayer identification numbers for certain preexisting accounts. This relief applies to eligible institutions under a Model 1 intergovernmental agreement for the 2025, 2026, and 2027 calendar years.

October 28, 2024: The IRS reminded employers that hiring individuals from specific groups can help reduce their tax liability through the Work Opportunity Tax Credit. To claim this credit, employers must certify the eligibility of new hires by submitting IRS Form 8850 to their state workforce agency within 28 days of the employee starting work.

October 29, 2024: The IRS announced the appointment of its new associate chief counsel for the Passthroughs, Trusts, and Estates office, which will focus on partnerships, S corporations, trusts, and estates.

October 29, 2024: The IRS reminded businesses that they can qualify [...]

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Weekly IRS Roundup August 26 – August 30, 2024

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of August 26, 2024 – August 30, 2024.

August 26, 2024: The IRS released Internal Revenue Bulletin 2024-35, which includes the following:

  • Revenue Ruling 2024-16, which provides the average annual effective interest rates for new loans under the Farm Credit System and lists the states within each Farm Credit System Bank Territory. These rates are used to compute the special use value of farmland for estate tax purposes under § 2032A of the Internal Revenue Code (Code).
  • Announcement 2024-32, which revokes the Code § 501(c)(3) determination for specified organizations and stipulates that contributions made to said organizations by individual donors are no longer deductible under Code § 170(b)(1)(A).
  • Proposed regulations that address issues under the dual consolidated loss rules, including the treatment of certain disregarded payments that result in losses for foreign tax purposes. These regulations clarify the interaction of dual consolidated loss rules with intercompany transactions under Code § 1503(d) and introduce rules for foreign hybrid entities.

August 26, 2024: The IRS identified new warning signs of incorrect Employee Retention Credit claims and urged businesses to review their filings to ensure eligibility and avoid mistakes. Common issues include unsupported claims of business suspension, wages paid to family members, and wages reported as payroll costs to qualify for the loan forgiveness.

August 27, 2024: The IRS concluded the “Protect Your Clients; Protect Yourself” summer campaign, which encouraged tax professionals to implement robust security measures to defend against identity theft and emerging data security threats. The campaign highlighted the critical need to protect sensitive information from cybercriminal exploitation.

August 27, 2024: The IRS reminded truckers that the deadline to file IRS Form 22901, Heavy Highway Vehicle Use Tax Return, and pay the heavy highway vehicle use tax for 2024 is September 3, 2024.

August 27, 2024: The IRS encouraged taxpayers to conduct a tax checkup at the end of the summer to adjust their withholding or payments and prevent unexpected tax bills next year. This initiative aims to help taxpayers align their tax payments with what they owe, especially those with gig economy jobs or other income not subject to withholding.

August 28, 2024: The IRS notified employers that they can use educational assistance programs to help employees repay their student loans through December 31, 2025.

August 28, 2024: The IRS extended the deadline to file federal individual and business tax returns and make tax payments for certain individuals and businesses in the US Virgin Islands that were affected by Tropical Storm Ernesto. The new deadline is February 3, 2025. The extended deadline is available to taxpayers in any area designated by the Federal Emergency Management Agency, including individuals and households that reside or have a business in any of the [...]

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Weekly IRS Roundup August 19 – August 23, 2024

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of August 19, 2024 – August 23, 2024.

August 19, 2024: The IRS released Internal Revenue Bulletin 2024-34, which includes the following:

  • Treasury Decision 10005, which provides the criteria for single-employer defined benefit plan sponsors to obtain approval to use plan-specific mortality tables when calculating present value for minimum funding. Effective July 31, 2024, these changes will apply to plan years beginning on or after January 1, 2025.
  • Notice 2024-61, which provides the inflation adjustment factor and phase-out amount for the enhanced oil recovery credit under § 38 of the Internal Revenue Code (Code) for calendar years 1991 through 2024.
  • Announcement 2024-31, which revokes the Code § 501(c)(3) determination for specified organizations and stipulates that contributions made to said organizations by individual donors are no longer deductible under Code § 170(b)(1)(A).

August 19, 2024: The IRS reminded taxpayers that summer day camp expenses may qualify for the Child and Dependent Care tax credit, which can help offset costs for working parents with children under 13. The credit may cover up to 35% of qualifying expenses, with a maximum eligible expense of $3,000 for one child and $6,000 for two or more.

August 19, 2024: The IRS released Notice 2024-63, which allows employers to match contributions to Code § 401(k) plans and similar retirement plans based on employees’ student loan payments. This guidance, effective for plan years beginning after December 31, 2023, includes eligibility criteria, employee certification requirements, and special nondiscrimination testing relief.

August 19, 2024: The IRS reminded taxpayers who requested an extension to file their federal taxes that free filing options, such as IRS Free File and MilTax (for eligible military members), are still available for filing electronically and claiming tax credits.

August 20, 2024: The IRS advised taxpayers who opted for paid tax preparers to help file their tax returns to verify the preparer’s credentials, check their history with the Better Business Bureau, and ensure they offer IRS e-file services.

August 20, 2024: The IRS highlighted the “Security Six,” a set of essential steps tax professionals can take to protect their offices, computers, and client data from cyber threats. These steps include using anti-virus software, firewalls, multifactor authentication, backup software or services, encrypted drives, and virtual private networks.

August 21, 2024: The IRS reminded school teachers that they can deduct up to $300 of unreimbursed classroom expenses for the 2024 tax year. This deduction applies to a variety of classroom items, including supplies, books, and equipment, and is available even if teachers take the standard deduction.

August 21, 2024: The IRS released Revenue Ruling 2024-18, which announces that interest rates for tax overpayments and underpayments under Code § 6621 will remain unchanged for the fourth [...]

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Weekly IRS Roundup June 10 – June 14, 2024

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 10, 2024 – June 14, 2024.

June 10, 2024: The IRS released Internal Revenue Bulletin 2024-24, which includes the following:

  • Revenue Ruling 2024-11, which provides the interest rates under 6621 of the Internal Revenue Code (Code) for tax underpayments and overpayments for the calendar quarter beginning July 1, 2024. The underpayment and overpayment interest rates will remain the same for the third calendar quarter of 2024.
  • Notice 2024-36, which provides the timeline for the second 2024 allocation round of the Qualifying Advanced Energy Project Credit program under Code 48C(e) and supersedes Appendices A, B and C of Notice 2023-44.
  • Notice 2024-39, which provides the inflation adjustment factor for the carbon oxide sequestration credit under Code § 45Q for taxpayers who make an election under § 45Q(b)(3) for calendar year 2024.
  • Notice 2024-40, which updates the corporate bond weighted average interest rate for plan years beginning May 2024, the 24-month average segment rates, the funding transitional segment rates applicable for May 2024 and the minimum present value transitional rates for April 2024.
  • Notice 2024-41, which provides a new elective safe harbor for taxpayers seeking to qualify their energy projects for the 10% Domestic Content Bonus Credit. The notice also modifies Notice 2023-38 by expanding the list of Applicable Projects to include hydropower and pumped hydropower storage facilities, among other changes.
  • Proposed Regulations, which provide guidance on information reporting requirements for transactions with foreign trusts and the receipt of large foreign gifts under Code § 643(i), 679, 6039F, 6048 and 6677 (the foreign trust and gift provisions). The proposed regulations would also provide that certain loans from a foreign trust and the use of trust property are reportable events.
  • Announcement 2024-22 and Announcement 2024-23, which revoke the Code § 501(c)(3) determination for specified organizations and stipulate that contributions made to said organizations by individual donors are no longer deductible under Code § 170(b)(1)(A).
  • Announcement 2024-24, which notifies taxpayers of the applicable Reference Standard 90.1 required under Code § 179D(c)(2) as part of the definition of energy efficient commercial building property, effective May 17, 2024.

June 10, 2024: The IRS highlighted options for taxpayers who missed the April filing deadline to file their 2023 federal income tax returns and reminded those taxpayers to pay the amounts owed as soon as possible to limit penalties and interest charges.

June 10, 2024: The IRS reminded taxpayers that the second quarter estimated tax payment deadline is June 17, 2024.

June 10, 2024: The IRS advised that most individual and business taxpayers can use the Online Payment Agreement service to set up a payment plan, including an installment agreement, to pay off an [...]

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Employers Be Forewarned and Forearmed: Recent IRS Announcements Require Action on ERTC Claims

Promoters and tax advisors have extensively marketed the Employee Retention Tax Credit (ERTC) as a way for employers to reclaim Federal Insurance Contributions Act payroll taxes paid during the first two years of COVID-19. The rules governing ERTC claims are complex and nuanced, however, resulting in increased scrutiny by the Internal Revenue Service (IRS). Asserting that many employers have improperly claimed these heavily marketed ERTC refunds, the IRS released two announcements, one on September 14, 2023, and the other on October 19, 2023, that address ERTC claims. In conjunction with these announcements, the IRS has already named fraudulent ERTC claims as number one on its “Dirty Dozen” list for 2023.

Specifically, the IRS will now target erroneous ERTC claims with penalties and interest. If a case is deemed fraudulent, the IRS will investigate and may impose civil and criminal penalties. The IRS has also suspended ERTC refund claims and provided a new withdrawal process for potentially fraudulent claims.




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Weekly IRS Roundup October 23 – October 27, 2023

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 23, 2023 – October 27, 2023.

October 23, 2023: The IRS is recruiting volunteers for the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs. VITA and TCE participants prepare millions of tax returns each year for low- to moderate-income taxpayers at no cost. No experience is necessary to volunteer. Volunteers will have the option to participate both in-person and via virtual sites. To learn more about becoming a VITA or TCE volunteer, visit IRS Tax Volunteers.

October 23, 2023: The IRS warned taxpayers to be wary of criminals falsely posing as legitimate charities to solicit donations. Donors can use the Tax-Exempt Organization Search tool on IRS.gov to find or verify legitimate charities.

October 23, 2023: The IRS released Internal Revenue Bulletin 2023-43, which includes the following:

  • Final regulations and proposed regulations that reduce the user fee to apply for or renew a preparer tax identification number (PTIN) from $21 to $11 (plus an amount payable directly to a third-party contractor).
  • Revenue Procedure 2023-28 provides guidelines for the development, printing and approval of 2023 substitute tax forms.
  • Proposed regulations that would provide guidance on §§ 30D(g) and 25E(f), including guidance involving:
    • Elections to transfer new and previously owned clean vehicle credits
    • Dealer qualifications for becoming an eligible entity that can receive advance payments of new and previously owned clean vehicle credits
    • Credit recapture.
  • Revenue Procedure 2023-33 sets forth the procedures for transferring new and previously owned clean vehicle credits from a taxpayer to an eligible entity under §§ 30D(g) and 25E(f), including procedures for dealer registration with the IRS, procedures for the suspension and revocation of said registration and the establishment of an advance payments program to registered dealers. This revenue procedure also provides guidance on the submission of seller reports and reports by qualified manufacturers.

October 24, 2023: The IRS reminded tax return preparers to renew their PTINs ahead of the upcoming tax filing season. Information to begin the online renewal process can be accessed here. Failure to have and to use a valid PTIN may result in penalties.

October 25, 2023: The IRS published Tax Tip 2023-118, which notes that tax professionals can use Tax Pro Accounts to send powers of attorney and tax information authorization requests directly to a client’s individual IRS Online Account.

October 25, 2023: The deadline to comment on proposed regulations involving information reporting, backup withholding and the determination of amount realized and basis for digital assets sales was extended from October 30, 2023, to November 13, 2023.

October 26, 2023: The IRS encouraged employers to electronically [...]

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Weekly IRS Roundup October 16 – October 20, 2023

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 16, 2023 – October 20, 2023.

October 16, 2023: The IRS published Revenue Ruling 2023-20, which provides the November 2023 applicable federal rates.

October 16, 2023: The IRS announced that the deadline for 2022 income tax returns and payments for most California taxpayers has been postponed again until November 16, 2023. Because of natural disasters last winter, spring due dates were previously postponed to October 16, 2023. The list of localities eligible for the extension are available here.

October 16, 2023: Tax professionals can now access 18 self-study seminars that satisfy continuing education requirements for the federal tax law and ethics categories. The seminars can be accessed at Nationwide Tax Forums Online for a fee of $29 per seminar.

October 16, 2023: The IRS announced that it recently awarded $51 million in Tax Counseling for the Elderly and Volunteer Income Tax Assistance grants to organizations that provide free federal tax return preparation services.

October 16, 2023: The IRS released Internal Revenue Bulletin 2023-42, which includes the following:

  • Notice 2023-65 provides guidance on the energy efficient home credit under Internal Revenue Code (Code) § 45L. It addresses who is eligible for the credit, how to determine the applicable amount of the credit, energy saving requirements, certification requirements and substantiation requirements.
  • Notice 2023-67 gives farmers and ranchers who were impacted by drought an extra year to replace livestock from forced sales and defer gains under Code § 1033(e).
  • Notice 2023-69 provides that any cash donations employers make to charitable organizations that provide relief to victims of the wildfires in Hawaii in exchange for sick, vacation, or personal leave that their employees forgo will not be treated as compensation. The notice also provides that these employees will not be treated as receiving the value of the leave as income and cannot claim a deduction for the leave that they donated to their employer. Employers may deduct these cash payments as a business expense or a charitable contribution deduction if the employer otherwise meets the respective requirements of the applicable sections of the Code.
  • Revenue Procedure 2023-35 provides that the IRS will not treat a redemption of a share in any money market fund as part of a wash sale under Code 1091.
  • Proposed regulations that provide guidance on how manufacturers, producers and importers of designated drugs will report excise tax liability under § 5000D. The proposed regulations also would except such excise tax from semimonthly deposit requirements.

October 18, 2023: The IRS released Notice 2023-70, which provides the adjusted applicable dollar amount to be multiplied by the average number of covered lives for purposes of calculating the fee imposed by §§ 4375 and [...]

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