Understanding the Employee Retention Credit Offset in the Bipartisan Tax Bill

The Senate is considering a bipartisan tax bill that, if passed, would grow the economy and extend financial support for working families. The bill proposes offsetting some of the costs for these provisions with changes to the Employee Retention Tax Credit (ERTC). The ERTC is a pandemic-era tax credit that was designed to help businesses remain open and their staff employed during the height of the COVID-19 outbreak and subsequent economic recession. Since then, the cost of the ERTC has far surpassed initial projections, in part due to fraudulent and improper claims. The bipartisan tax bill will reduce ERTC fraud and provide about $79 billion in offsets.

When a Credit Outlives Its Policy Purpose

The ERTC was initially enacted in the March 2020 CARES Act. Eligible employers could claim 50% of up to $10,000 in qualifying wages against their payroll tax liability annually. Employers whose operations were impacted by COVID-19 mandates or whose revenues decreased by 50% compared with the same quarter in the prior year qualified to claim the credit. qualified to claim the credit.

Congress extended and enhanced the credit in late 2020 and again in 2021. The changes:

• Allowed employers to apply the ERTC to wages paid throughout the 2021 calendar year,
• Increased the maximum credit from $5,000 to $14,000 and then to $28,000,
• Extended eligibility to employers who received a Paycheck Protection Program loan, (PPP) loan,
• Created a new credit for recovery startup businesses, among other reforms.

Following the ERTC’s expansion, an aggressive marketing campaign by advisors and firms advertised their services to help businesses claim the credit. These firms typically take a cut of 20% or more of the refund a client receives. Because taxpayers can amend their returns for up to three years, businesses can continue to file ERTC claims through April 2025.

The IRS has seen a sharp uptick in ERTC claims in recent months. In September 2023, after the IRS had accumulated 3.6 million claims, the agency announced a moratorium on processing refunds. Many of those claims have since been deemed erroneous or even fraudulent. In December 2023 alone, 20,000 claims were denied. The claims backlog has grown to over 1 million, though this figure was last updated in December 2023.

The total cost of the credit was initially projected to be $50 billion—now, projections exceed $550 billion.

A Path Forward

The bipartisan tax agreement under negotiation in the  Senate would expand the statute of limitations for the IRS to pursue fraudulent or erroneous claims of the credit and prohibit new claims after January 2024. These changes are estimated to raise or otherwise save $79 billion in federal coffers and help offset other reforms in the tax package.

Why the ERTC Offset Matters

Although many lawmakers in both parties support curtailing the ERTC, some have raised objections about its use as an offset in the bipartisan tax bill.

There are three key reasons that curtailing the ERTC is a necessary and worthy offset.

We’re Past the Worst of the Pandemic

Placing a limitation on new ERTC claims makes sense given it no longer serves its primary purpose of helping businesses weather the worst of the pandemic. The proposed reforms would not prevent businesses who legitimately claimed the ERTC before the deadline from accessing the credit if the IRS determines they are eligible—they merely prevent new claims and give the IRS more tools to deny erroneous claims or go after people who file fraudulent claims.

Fraudulent or Improper Claims Continue to Be Filed and Paid

The aggressive marketing of the ERTC has led to both a higher volume of claims and a greater share that the IRS suspects are erroneous or fraudulent. The agency’s moratorium in September 2023 did not stop claims from coming in. In fact, the backlog of claims increased significantly after the IRS announced its moratorium even though earlier claims continue to be processed.

Despite the IRS moratorium on processing new claims, Congress action is required to disallow them, and every day that lawmakers fail to act is another day of new claims. Weeks or months of inaction could make a difference of billions—or even tens of billions—of dollars of hard-earned American taxpayer dollars.

Offsets Matter, and the ERTC Offset Is Real

Lawmakers should offset proposals that increase spending or cut taxes. It was encouraging to see a robust offset in the bipartisan tax bill, even though lawmakers will need to find additional offsets to make the proposed tax cuts permanent after 2025.

Moreover, it is unclear if Congress will have another opportunity this year to reduce the deficit through a standalone ERTC bill. The opportunity exists now to limit new ERTC claims and responsibly offset the cost of new tax cuts.

A Model for 2025

Lawmakers will face a significant challenge offsetting trillions of dollars in tax cut extensions when many provisions from the 2017 Tax Cuts and Jobs Act expire next year. The ERTC provisions in the current tax bill are an example of lawmakers working together to find responsible and robust fiscal offsets. Congress should build on this progress in the months and years ahead, improving our fiscal trajectory in the process.