The Employee Retention Credit, or ERC, was part of the CARES Act, which provided sweeping relief to individuals and businesses during the pandemic. The ERC credit has been modified four times since it was enacted. The last modification was in July of 2025 when the One Big Beautiful Bill Act (OBBA, P.L. 119-21) was enacted. The OBBA made two important and notable changes to pending claims under the ERC. Six months after those changes went into effect, taxpayers are starting to see their ERC claims disallowed as a direct result of the OBBA show up in the mailbox.
The OBBA made two important changes to the ERC. First, it extended the amount of time that the IRS has to examine ERC claims relating to the third quarter of 2021. Before the OBBA, the IRS had five years from the later of the date on which the relevant return was filed, or the deemed filing date. After the OBBA, the IRS has six years to examine those claims and the run-date was changed to the latest of (1) the date the original return was filed, (2) the deemed filing date, or (3) the date on which the ERC claim was filed (via Form 941-X). Second, the OBBA retroactively disallowed all ERC claims that were filed after January 31, 2024 and not paid out or allowed by July 4, 2025.
Taxpayer submitted an ERC claim after January 31, 2024 and receives the “OBBA” denial.
Taxpayers who submitted a claim for the ERC after January 31, 2024 will receive the letter shown above. Those taxpayers have two choices: accept that the claim is denied and walk away from it, or fight the denial. There are interesting arguments about why retroactive changes to the Tax Code are unconstitutional. But constitutional arguments are expensive to make, they take a really long time, and they are rarely successful.
Taxpayers who receive OBBA denials and did in fact file after January 31, 2025 should consider the matter closed unless there is enough money at stake to make litigating the retroactive nature of the law change economically viable.
Taxpayer submitted an ERC claim before January 31, 2024 and receives the “OBBA” denial.
Some taxpayers are receiving these disallowance letters that reference the OBBA, but they did, in fact, submit their ERC claim prior to the January 31 deadline.
OBBA Denial Received - Proof of Timely Submission is Available
Taxpayers who receive the OBBA denial and have proof of timely submission prior to January 31, 2024 should respond to the letter with proof of that timely submission. Follow the how-to guide I published here, enclosing proof of timely submission and formally protesting the disallowance.
OBBA Denial Received - Protective Claim was Timely Filed
A protective claim is a type of claim that is made to the IRS when the basis for the claim is uncertain, but the taxpayer doesn’t want to waive any important rights. Many protective claims are currently being filed is in the Cannabis Industry right now. Under current law, Cannabis dispensaries and growers may not deduct any of their expenses from their federal income tax returns because of a law that prohibits deducting expenses associated with the sale of illegal drugs. A December 2025 Executive Order indicates that the law prohibiting deducting expenses may soon change. Any business impacted by section 280E, which prohibits deducting expenses now, should consider filing a protective claim for refund to preserve the right to amend their returns and claim the expenses later if the law is changed.
Many business owners filed their ERC claims as protective claims, but then notified the IRS that they were activating the protective claim. These taxpayers who activated the protective claim after January 31, 2024 are receiving OBBA disallowances. They should follow the same procedure as above, protesting the disallowance and notifying the IRS that the protective claim’s timely submission obviates application of the OBBA deadline.
OBBA Denial Received - Proof of Timely Submission is Either Unavailable or Unclear
Some taxpayers will receive the OBBA disallowance, be certain that the claim was timely submitted, but do not have solid proof of the submission readily available. Absent proof of mailing or e-filing, it is difficult, but not impossible, to establish timely filing. Consider whether the person who submitted the claim can prepare a declaration, whether there is indirect proof of submission like a credit card charge showing the shipping charge on January 28, 2024. Think carefully and brainstorm with your tax professional about indirect ways to establish proof of mailing. If you don’t have any proof at all, direct or indirect, consider dropping the claim. Legal fees incurred to establish timely filing will only lead to further frustration. If you have strong indirect proof, provide it to the IRS with a letter using the how-to guide.
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