ERC’s Repeal is Constitutional
No this is not an April Fool's post
Can Congress do that? The OBBBA retroactively repealed portions of the Employee Retention Credit, preventing some companies that had filed for a refund from receiving the money. In the aftermath of the bill (and previously with the proposed ERC repeal legislation), there was both outrage and confusion about whether such a change was allowed. In a recent case, the Court of Federal Claims ruled that, yes, Congress can do that.
Photo by Simon Schwyter on Unsplash
History
Juggler Dave and Friends filed ERC claims for the 2021 first, second, and third quarters on May 1, 2024, based on a decline in gross receipts. The three claims totaled approximately $331,000, with more than half of that coming from the third quarter.
After receiving no response from the IRS regarding the amended returns, the company filed a refund suit on February 25, 2025. During the litigation, a settlement offer was made, and the case was paused on May 22, 2025. During that pause, the first- and second-quarter refunds were paid, but the third was still outstanding when the OBBBA was passed, repealing the Credit retroactively.
Based on the new law, the Government moved to have the case dismissed.
The Court looked at five factors to determine if the enactment of the retroactive repeal violated the Company’s due process:
Whether the provision is wholly new,
If the change resolves uncertainty in the law, i.e., is it curative in nature,
If the change is remedial,
The length of the retroactivity period, and
Whether the affected parties had notice of the change before engaging in the regulated conduct.
The Court addressed each in turn.
Wholly New
The Court quickly dismissed the first factor, finding that the change to ERC did not constitute a wholly new tax but instead modified the period during which a taxpayer could claim the ERC.
Curative or Remedial
The second and third factors were considered together, with the Court leaning heavily on the rumors of fraud in the program. It pointed to the House Ways and Means Committee holding a hearing on the widespread ERC fraud and the IRS’s moratorium on processing claims to prevent fraudulent claims. Based on these events, and the Ways and Means Committee Report explaining that the repeal would help limit fraud and abuse (this was for HR 7024, but the Court was convinced that it would apply to the OBBBA provision), the Court was satisfied that Congress had a legitimate reason for the repeal.
Retroactivity Period
Turning to the time elapsed between the repeal’s effective date and the bill’s passage, the Court looked to the history of such actions. The Supreme Court has upheld changes with two-year, six-year, and seven-year lags. The Ninth Circuit upheld a four-year period, as did the Second Circuit. And the Federal Circuit upheld a five-year lag. In the context of these cases, the Court had no issue with a sixteen-month lag.
Notice
Finally, the Court looked at the notice factor. On this point, the Court first noted the IRS’s moratorium on processing claims. Then the Court relied on the proposed legislation that was approved by the House Ways and Means Committee in January 2024.
On the flip side, the Court found it hard to believe that the Company relied on the statute when it delayed filing its claim for two and a half years from the original filing date.
With none of the factors weighing in favor of the Company, the Court upheld OBBBA’s retroactive repeal of the ERC.
Did the Court get it right?
To be clear, this was an uphill battle from the start. But if any case should have had a chance at challenging the new law, it should have been this one. The Company filed its claim, initiated the refund suit, and was in talks to settle the matter when the new law upset the apple cart. It is easy to imagine that the Company missed out on its 3rd-quarter refund by a matter of days if the settlement had been just a bit quicker.
However, the Court did not adequately weigh the time factor. Yes, there are cases suggesting the timing of the new law could be reasonable, but that is not the same as any change enacted within seven years being reasonable. The Company’s counsel is partly at fault here, stating to the Court that there was no precedent for such a delay, giving up the chance at distinguishing this change from all the others. Still, the Court should have examined how this delay interacted with the nature of the tax and the circumstances surrounding the credit, but declined to do so.
And then there is the matter of notice. The Court’s reliance on the IRS’s failure to administer the program is improper. It is not the IRS that can enact the law or make a legislative change. Nor has the IRS been forthcoming about the actual rates of fraud in the program. This sets a bad precedent for the IRS to flagrantly ignore any program it disagrees with, in the hope that the courts will treat that as notice.
Turning to the original ERC killer bill (HR 7024), it is hard to be convinced that it provided legitimate notice, since it was never passed and expired on the Senate floor. The ERC killer bill and the OBBBA were passed by different Congresses with different goals in different years. Does this mean that any proposed legislation provides indefinite notice?
If the Court had done a more thorough job in its analysis, it may have reached a different conclusion, but it seems likely that the first three factors weighed against the taxpayer, and the fourth would not have moved the needle much.
Wrap-up
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The content of this article is for informational purposes only and should not be taken as tax, legal, benefits, financial, or HR advice. I am a lawyer, but receiving this newsletter does not mean I am your lawyer. Since rules and regulations change over time and can vary by location, consult a lawyer or HR expert for specific guidance.