The Infrastructure Investment and Jobs Act ended the Employee Retention Credit three months earlier than planned, cutting off eligibility for most employers as of September 30, 2021, instead of December 31. Signed by President Biden on November 15, 2021, the law was projected to raise roughly $8.2 billion by pulling back the fourth quarter of the credit, one of several revenue provisions helping to pay for the $1.2 trillion package.1National Conference of State Legislatures. Infrastructure Investment and Jobs Act2Joint Committee on Taxation. Estimated Revenue Effects of Division H of the Infrastructure Investment and Jobs Act That accounting savings has since been overshadowed by the tail of the program: by mid-2025 the IRS had paid out roughly $283 billion in ERC refunds and was still unwinding improper claims.3GAO. Employee Retention Credit
What the Infrastructure Law Changed
Section 80604 of the IIJA amended Section 3134 of the Internal Revenue Code, moving the credit’s termination date from December 31, 2021, to September 30, 2021.4Internal Revenue Service. Notice 2021-65 For most employers, wages paid after September 30, 2021, no longer generated any ERC.
The change was retroactive in practical effect. By the time the bill became law in mid-November, the fourth quarter was already six weeks old, and many employers had been reducing their federal payroll tax deposits, or had requested advance payments, on the assumption that the credit still applied through year-end.
The Joint Committee on Taxation scored the early cutoff at $8.22 billion in additional revenue over the 2022–2031 budget window, with essentially all of that concentrated in 2022.2Joint Committee on Taxation. Estimated Revenue Effects of Division H of the Infrastructure Investment and Jobs Act
Who Could Still Claim the Credit in Q4 2021
The IIJA left one category of employer eligible for the fourth quarter: recovery startup businesses. Under Section 3134(c)(5), a recovery startup business is one that began operations after February 15, 2020, and had average annual gross receipts under $1 million for the three preceding taxable years.5IRS. Frequently Asked Questions About the Employee Retention Credit
For Q4 2021 specifically, Section 80604 also dropped the earlier rule that a recovery startup business could not otherwise qualify under the suspension-of-operations or gross-receipts-decline tests. The maximum credit for a recovery startup business was $50,000 per quarter.6IRS. Employee Retention Credit — 2020 vs 2021 Comparison Chart
What Employers Had to Do About the Fourth Quarter
The IRS spelled out the cleanup in Notice 2021-65, issued on December 20, 2021.7IRS. IRS Notice 2021-65 Employers who had received advance ERC payments for Q4 2021 had to repay them by the due date of their employment tax return, generally January 31, 2022. Employers who had reduced their payroll tax deposits in anticipation of the credit had to resume full deposits and return the retained amounts.8Congressional Research Service. Employee Retention Credit — CRS Insight
Penalty relief was available for employers who had reduced deposits between October 1 and December 20, 2021, if three conditions were met: the reduction had been consistent with earlier IRS guidance in Notice 2021-24, the retained amounts were deposited by the applicable due date, and the full tax liability was reported on the employment tax return.9Tax Notes. IRS Addresses Erroneous Employee Retention Credit Payments Employers who fell outside those conditions could still ask for reasonable-cause relief under Section 6656.
Why the $8.2 Billion Turned Out to Be a Footnote
The scored savings from ending the credit early became small compared with what happened afterward. Original cost projections for the ERC were roughly $77 to $78 billion. Actual payouts blew past that figure. By September 2023, the IRS had already paid out more than $230 billion.10Cato Institute. Employee Retention Credit Shows Folly of Tax Code Subsidies By June 2025, the total sat at roughly $283 billion across nearly 5 million processed claims.3GAO. Employee Retention Credit Some analysts have estimated ultimate program costs could exceed $550 billion, about seven times the original projection.11Committee for a Responsible Federal Budget. Employee Retention Credit Faces 7x Cost Overrun
Much of the growth came from aggressive marketing by third-party promoters. The IRS has repeatedly warned about firms that used radio, television, and social media ads, charged large upfront or contingency fees, and pressured businesses into filing without checking whether they qualified.12IRS. Employee Retention Credit Most claims arrived on paper Forms 941-X, limiting the agency’s ability to screen them electronically.13GAO. Employee Retention Credit Report
The IRS Response After the Program Ended
On September 14, 2023, the IRS imposed a moratorium on processing new ERC claims to develop better screening tools. The backlog remained large. As of early April 2025, more than 597,000 ERC claims still sat unprocessed.14Taxpayer Advocate Service. The ERC Claim Period Has Closed
The agency ran several tracks at once. It issued disallowance notices (Letters 105-C and 106-C) covering about 84,000 returns, with roughly 28,000 going out in the summer of 2024 based largely on automated risk-filter analysis.15Taxpayer Advocate Service. Protect Your Employee Retention Credit Claim By April 2025, the IRS had disallowed, reversed, or recaptured about 214,000 claims in total.13GAO. Employee Retention Credit Report
A withdrawal program let employers pull back ineligible claims that had not yet been paid, or checks that had been received but not cashed, avoiding audits, penalties, and interest.12IRS. Employee Retention Credit Two Voluntary Disclosure Programs let employers who had already received and used improper ERC money settle up. The first, announced in early 2024, required repayment of 80% of the credit in exchange for penalty relief and audit protection.16IRS. Announcement 2024-3 — ERC Voluntary Disclosure Program The second, which closed November 22, 2024, required repayment of 85%, let participants keep any overpayment interest already received, and provided penalty and audit relief for the resolved periods; the IRS said it targeted more than $1 billion in errant claims and sent letters to up to 30,000 businesses.17IRS. Employee Retention Credit Voluntary Disclosure Program
Later Legislation Tightened the Rules Further
Congress revisited the credit in the One Big Beautiful Bill Act (P.L. 119-21), enacted July 4, 2025. Section 70605 retroactively barred all ERC refund claims for the third and fourth quarters of 2021 that were filed after January 31, 2024. Taxpayers who had filed late claims but already received refunds before July 4, 2025, did not have to return the money, though the IRS noted that “other compliance activities may still result in an adjustment or bill.”18EY Tax News. New FAQs on Employee Retention Credits Seek to Clarify Disallowances Under OBBBA
The same law extended the IRS’s assessment statute of limitations on ERC claims to six years, added a $1,000-per-failure penalty on ERC promoters who fail due diligence requirements, and expanded the 20% erroneous-refund-claim penalty under Section 6676 to cover employment tax credits.19Iowa State University CALT. One Big Beautiful Bill Act Implements Significant Tax Package The window for filing new ERC claims of any kind had already closed on April 15, 2025, when the statute of limitations for 2021 claims expired.14Taxpayer Advocate Service. The ERC Claim Period Has Closed
If Your Claim Was Disallowed
Section 6532 of the tax code bars the IRS from issuing a refund if more than two years have passed since a disallowance notice, even if the underlying claim would otherwise be valid.14Taxpayer Advocate Service. The ERC Claim Period Has Closed To address cases running up against that deadline, the IRS began issuing Notice CP320B in April 2026, along with Form 907, which allows both the taxpayer and the IRS to agree to extend the time to bring a refund suit.15Taxpayer Advocate Service. Protect Your Employee Retention Credit Claim
A February 2026 GAO report found that about 83% of all ERC refunds, roughly $235 billion, were issued between 2022 and June 2025, a period during which the IRS lacked strong screening mechanisms. The IRS never completed an improper payment estimate for the program, and Treasury declined to conduct one, calling it impractical for short-term pandemic programs.3GAO. Employee Retention Credit The statute of limitations for assessing tax on certain paid improper ERC claims has already expired, though the IRS retains authority to pursue fraud cases indefinitely.13GAO. Employee Retention Credit Report