What Is the ERC Statute of Limitations?

The Employee Retention Credit (ERC) was a refundable tax credit designed to help businesses keep employees on their payroll during the COVID-19 pandemic. A statute of limitations in a tax context is the legally defined period during which the Internal Revenue Service (IRS) can assess additional taxes or a taxpayer can claim a refund. The timeframes for the IRS to review ERC claims are multifaceted, having been shaped by specific legislation that created different rules for different periods of the credit.

The Standard Three-Year Assessment Period

For most federal tax returns, including payroll tax returns, the IRS operates under a three-year statute of limitations for assessment. This three-year window does not begin on the day the return is submitted; instead, the clock starts on the later of two dates: the date the payroll tax return was filed or the return’s original due date. This rule applies to the quarterly payroll tax form, Form 941.

For example, if a business filed its third-quarter 2020 Form 941 on its due date of October 31, 2020, the IRS would have until October 31, 2023, to audit that return. If the business filed the return early, the three-year clock would still start from the due date.

The Special Five-Year Period for ERC Audits

Congress enacted legislation that extended the audit period for certain ERC claims, creating a five-year statute of limitations for the IRS to assess any amount attributable to the credit. This five-year assessment period applies exclusively to claims for wages paid in the third and fourth quarters of 2021.

For all other quarters in which the ERC was available—all four quarters of 2020 and the first two quarters of 2021—the standard three-year statute of limitations remains in effect.

Audit Periods for Fraud or Substantial Understatements

Beyond the standard three-year and five-year periods, other circumstances can extend the IRS’s window to conduct an audit. If a business understates its tax liability by more than 25% of the amount required to be shown on the return, the statute of limitations extends to six years. This provides the IRS a longer period to detect and correct significant errors.

An exception also exists in cases of fraud. If the IRS determines that a return was filed with the intent to evade tax, there is no statute of limitations for assessment. This means the agency can open an audit and assess taxes, penalties, and interest at any time, regardless of how many years have passed.

IRS Period to Recover Erroneous Refunds

Separate from its authority to audit and assess tax, the IRS has a specific timeframe to file a civil lawsuit to recover a refund it believes was paid in error. The IRS has two years from the date the refund was paid to take legal action. This period extends to five years if the agency can prove the refund was obtained through fraud or the misrepresentation of a material fact.

Deadline for Filing an ERC Refund Claim

The deadline for a taxpayer to file a claim for a refund is distinct from the period the IRS has to assess tax. Due to concerns about a rising number of questionable claims, the landscape for filing new ERC claims has changed. On September 14, 2023, the IRS implemented a moratorium on processing new ERC claims to add more safeguards against fraud.

Legislation also made any ERC claims filed after January 31, 2024, ineligible for payment. While businesses previously had deadlines in 2024 and 2025 to amend their returns, the moratorium and this cutoff have effectively closed the window for new claims.

Documentation to Maintain During the Statutory Period

To substantiate an ERC claim during a potential audit, businesses must maintain documentation. The IRS requires detailed records to verify the claim, including payroll records for each employee showing gross wages paid during the relevant periods.

Businesses must also keep records proving their eligibility pathway. If eligibility was based on a decline in revenue, the business needs gross receipts calculations for the claimed quarter and the corresponding quarter in 2019. If eligibility was based on a suspension of operations due to a government order, the business must retain copies of the specific orders that impacted its operations.