ERC enforcement in 2026 under the One Big Beautiful Bill Act

The One Big Beautiful Bill Act introduces sweeping enforcement measures targeting fraudulent and improper employee retention credit claims starting in 2026. Under Section 70605 of the new legislation, the IRS now has significantly expanded authority to penalize promoters, block late claims, and audit businesses that previously filed for the COVID-era credit. These changes represent one of the most aggressive federal crackdowns on a single tax credit program in recent history.

For businesses that legitimately claimed the Employee Retention Credit, understanding the new enforcement landscape is essential for 2026 tax compliance. The legislation fundamentally restructures the IRS's ability to investigate, assess penalties, and recover improperly claimed credits. Businesses and their advisors must now navigate a tighter compliance environment where the consequences of past errors have grown dramatically.

During the pandemic, a flood of aggressive marketing campaigns encouraged businesses to claim the ERC regardless of actual eligibility. The One Big Beautiful Bill Act directly addresses that problem by targeting the promoters who fueled improper claims, extending the government's audit reach, and permanently closing the filing window for new claims.

How Section 70605 redefines ERC enforcement in 2026

The One Big Beautiful Bill Act creates an entirely new enforcement framework through Section 70605 that goes far beyond standard IRS penalty structures. This section introduces multiple layers of accountability affecting both businesses and the advisors or promoters who helped them file employee retention credit claims.

The legislation establishes four primary enforcement mechanisms that work together to close loopholes, deter fraud, and recover improperly distributed credits.

• Heavy financial penalties for ERC promoters who aided fraudulent or negligent claims
• A hard deadline that blocks all new ERC claims filed after January 31, 2024
• An extended six-year audit window that doubles the standard IRS assessment period
• Classification of ERC-related activities as listed transactions with mandatory reporting requirements

The aiding and abetting penalty provisions reach back to the original start of the ERC program on March 12, 2020, meaning promoters who provided assistance years ago now face financial consequences under the new rules. The due diligence requirements, however, apply only to advice provided after the date of enactment. Combined with the extended audit window and the permanent claim deadline, these layered provisions create an unprecedented enforcement reach for the IRS heading into 2026 and beyond.

Understanding the 2026 penalty structure for ERC promoters

The One Big Beautiful Bill Act introduces a tiered penalty structure that distinguishes between different types of violations. For promoters who actively assisted in filing fraudulent or ineligible employee retention credit claims, the penalties are severe.

The legislation imposes fines of $200,000 per violation for entities or $10,000 per violation for Individuals. Alternatively, if 75% of the promoter's income from ERC advisory services exceeds those amounts, the IRS can impose the higher figure. This percentage-based calculation ensures that high-revenue promoters face penalties proportional to their involvement.

For promoters who fail to comply with due diligence requirements, the legislation imposes a separate $1,000 penalty per violation. These standards are modeled after the requirements under Section 6695(g) of the Internal Revenue Code, which governs tax preparation standards for earned income credits and other refundable credits.

The due diligence requirements require promoters to verify client eligibility before assisting with ERC claims, including confirming qualifying government orders or significant gross receipts declines during the relevant periods.

Who qualifies as an ERC promoter under the new law

The One Big Beautiful Bill Act carefully defines who falls under the classification of a COVID-ERTC promoter. Under the legislation, a person or firm qualifies as a promoter if they meet either of two conditions.

1. A firm that charged contingency fees based on the credit amount and derived more than 20% of its gross receipts from ERC advisory services during the relevant tax year
2. A firm that derived more than 50% of its gross receipts from ERC services, or earned more than 20% of receipts from ERC services, with aggregate ERC-related revenue exceeding $500,000

The law includes aggregation rules under Sections 52(a), 52(b), 414(m), and 414(o) of the Internal Revenue Code, preventing firms from splitting operations across related entities to avoid revenue thresholds. Certified professional employer organizations under Section 7705 are explicitly excluded from the definition of promoter.

How the January 2024 ERC claim deadline affects 2026

One of the most consequential provisions in Section 70605 is the hard cutoff for new ERC claims. The legislation states that no credit or refund related to Section 3134 of the Internal Revenue Code shall be allowed after the date of enactment unless the taxpayer filed the claim on or before January 31, 2024.

This deadline permanently closes the ERC program to any business that had not already submitted a claim. For businesses working with S Corporations and C Corporations that may have been evaluating late claims, the January 31, 2024, deadline applies uniformly regardless of entity structure.

For businesses that filed before the deadline but are still awaiting processing, the legislation does not automatically disqualify those claims. However, pending claims will be subject to the enhanced audit procedures and extended assessment periods established by the same legislation.

The extended six-year audit window affects 2026 assessments

The One Big Beautiful Bill Act amends Section 3134(l) of the Internal Revenue Code to establish a six-year statute of limitations for ERC-related assessments. This doubles the standard three-year period that typically applies to employment tax returns.

The six-year period begins from the latest of three possible dates, including the original return filing date, the deemed filing date under Section 6501(b)(2), or the date the claim for credit or refund was submitted. This extended window has significant implications for Partnerships and other pass-through entities that claimed the credit during 2020 and 2021.

The legislation also addresses improperly claimed ERTC wages. When the IRS assesses additional tax due to an improperly claimed credit, the limitation period for related wage deduction adjustments extends to match the six-year window, preventing situations in which the IRS could disallow the credit but be time-barred from adjusting corresponding deductions.

Calculating the financial exposure for businesses in 2026

Understanding the potential financial impact of an ERC enforcement action requires careful analysis. Consider a mid-sized business that claimed $500,000 in employee retention credit across multiple quarters during 2020 and 2021.

• Repayment of the full $500,000 credit amount plus interest from the original claim date
• Potential 20% accuracy-related penalty under existing Section 6662 rules, adding $100,000 to the liability
• The claimed credit amount reduces adjustments to wage deductions
• Additional income tax liability resulting from restored wage deductions
• State tax implications that may follow federal adjustments, varying by jurisdiction, and 2026 California State Tax Deadlines, or other relevant state filing requirements

For the promoter that assisted with this claim, penalties can be even more substantial. A promoter earning $2 million annually from ERC advisory services could face penalties calculated at 75% of that income, resulting in $1,500,000 in potential fines for a single tax year of advisory activity.

ERC-listed transaction rules create 2026 obligations

The One Big Beautiful Bill Act classifies ERC-related promotional activities as listed transactions, triggering mandatory reporting and record-keeping requirements similar to those applied to abusive tax shelters. Promoters must report their clients to the IRS and maintain detailed records of all ERC-related advisory activities; failure to comply may trigger additional penalties of up to $200,000 per year for entities.

This classification has several practical implications for businesses preparing their 2026 tax compliance strategies.

1. Businesses that received ERC advisory services from firms meeting the promoter definition may receive IRS notices requesting claim information.
2. The listed transaction designation gives the IRS additional tools to identify questionable claims through promoter reporting data.
3. The reporting requirements create a comprehensive database of ERC promotional activity for targeted enforcement actions.

Steps businesses should take to protect themselves in 2026

Given the expanded enforcement environment, businesses that claimed the employee retention credit should proactively evaluate their claims and prepare for potential IRS inquiries during the 2026 tax season.

The priority is to conduct a thorough review of all ERC claims by a qualified tax professional independent of the original promoter. This review should assess whether the business genuinely met eligibility requirements for each quarter in which the credit was claimed. Businesses should gather and organize the following documentation for their Home office files and business records.

• The government orders that affected business operations, including dates and specific restrictions
• Quarterly gross receipts comparisons showing the required decline percentages
• Payroll records identifying qualified wages and the employees for whom credits were claimed, as outlined in IRS Publication 15, Employer's Tax Guide
• Correspondence with any ERC promoter or advisor, including engagement agreements and fee structures
• Internal analyses documenting the business's eligibility determination

Businesses should also review their Travel expenses and Meals deductions for the same periods to ensure consistency with any ERC adjustments that may result from enforcement action.

How ERC enforcement affects legitimate tax planning for 2026

The One Big Beautiful Bill Act's enforcement provisions offer lessons that extend beyond the employee retention credit program. The legislation signals a broader shift in how Congress and the IRS approach enforcement of pandemic-era tax benefits and future refundable credit programs heading into 2026 and beyond.

The expanded audit windows and retroactive penalties underscore the value of maintaining comprehensive tax records well beyond the standard three-year retention period. Businesses should adopt a minimum retention policy of 6 years for all employment tax records and consider longer retention for claims involving refundable credits, as recommended by IRS Publication 334, Tax Guide for Small Business.

Looking ahead, businesses should focus on legitimate tax strategies that provide sustainable benefits under the One Big Beautiful Bill Act. Strategies such as Depreciation and amortization planning, Vehicle expenses optimization, and Hiring kids for family businesses offer reliable 2026 tax benefits without the enforcement risks associated with aggressive credit claims.

Navigate ERC enforcement with confidence using Instead

The One Big Beautiful Bill Act's ERC enforcement provisions create a complex compliance landscape that requires careful navigation in 2026. Whether your business claims the employee retention credit, is preparing for a potential IRS inquiry, or simply wants to ensure that current tax strategies are built on solid compliance foundations, proactive planning is essential.

Instead's comprehensive tax platform helps businesses identify legitimate tax-saving opportunities while maintaining full compliance with federal requirements. Instead's intelligent system analyzes your business structure, evaluates available deductions and credits, and generates documentation that supports every claimed benefit. The Instead platform connects you with qualified tax professionals who understand the new enforcement environment and can guide your business through any ERC-related concerns.

Get started with a pricing plan that fits your business needs and build a tax strategy designed to withstand scrutiny while maximizing your legitimate savings in 2026.

Frequently asked questions

Q: Can I still claim the employee retention credit in 2026?

A: No. The One Big Beautiful Bill Act blocks all new ERC claims filed after the date of enactment unless the taxpayer submitted the claim on or before January 31, 2024. Businesses that did not file before this deadline can no longer claim the credit regardless of their eligibility status during the original program period.

Q: How long does the IRS have to audit my existing ERC claim in 2026?

A: The One Big Beautiful Bill Act extends the IRS assessment period to six years for all ERC-related claims. This period begins from the latest of the original return filing date, the deemed filing date, or the date the credit or refund claim was submitted. This doubles the standard three-year statute of limitations.

Q: What penalties do ERC promoters face under the new 2026 enforcement rules?

A: Promoters face penalties of $200,000 per violation for entities or $10,000 for individuals when aiding fraudulent claims, or 75% of their ERC advisory income if that amount is higher. Separate due diligence failure penalties of $1,000 per violation also apply. Most penalty provisions reach back retroactively to March 12, 2020.

Q: Does the new law affect businesses that received legitimate ERC payments?

A: Businesses with legitimate claims that were properly documented and filed before January 31, 2024, are not automatically affected. However, all existing claims are subject to the extended six-year audit window. Businesses should maintain comprehensive eligibility documentation and consult with independent tax professionals to confirm their claims meet all requirements.

Q: What should I do if I suspect my ERC claim was filed improperly?

A: Contact an independent tax professional immediately to review your claim. The IRS has established voluntary disclosure programs that may reduce penalties and interest for businesses that self-correct before an examination begins. Early action demonstrates good faith and typically results in more favorable resolution terms.

Q: Are certified professional employer organizations affected by the promoter penalties?

A: No. The legislation explicitly excludes certified professional employer organizations, as defined in Section 7705 of the Internal Revenue Code, from the definition of promoter. PEOs that provided standard payroll processing services are not subject to the new promoter penalties.