Your ERC claim is open for six years, and buyers know

An Employee Retention Credit claimed for the third quarter of 2021 can be assessed for six years, running from the latest of the original return’s filing date, its deemed filing date, or the date the refund claim was made. Earlier quarters run shorter but still-live clocks. Buyers diligence all of it and price it separately.

Does selling the company close out an open ERC claim?

Selling the company does not close an Employee Retention Credit claim. The claim belongs to the employer entity that filed the Form 941 or 941-X, and the assessment period runs on its own schedule regardless of a closing date. In an equity sale the exposure travels with the company. In an asset sale it must be named.

In an asset sale it generally stays with the selling entity, subject to state successor liability rules, and a pending refund is an asset that must be assigned or excluded.

The One Big Beautiful Bill Act, enacted July 4, 2025, rewrote the clock for the credit’s final quarters. Section 3134(l), as amended by section 70605(e), provides that the period for assessing any amount attributable to the credit does not expire before six years after the latest of the original return’s filing date, the date it is treated as filed under Section 6501(b)(2), or the date the claim for credit or refund was made. It ran five years before, without that third prong, and the amendment applies to assessments made after July 4, 2025. That prong is what matters: many employers claimed on an amended return long after the quarter closed.

Law: 26 U.S.C. 3134(l); Pub. L. 119-21, sec. 70605(e), (g)(3).

How long can the IRS still assess an ERC refund I already received?

The answer depends on which quarters were claimed, because two different statutes were in play. Credits for 2020 and the first two quarters of 2021 arose under CARES Act Section 2301. Credits for the third quarter of 2021, and the fourth quarter for a recovery startup business, arose under Section 3134 of the Code, which carries the extended period.

Law: 26 U.S.C. 3134(l), 6501(b)(2), 6513(c); CARES Act sec. 2301.

Those dates are defaults. A late-filed return runs from actual filing, a signed consent moves the date, and a false or fraudulent return, or no return, leaves the period open under Section 6501(c). A Form 941-X for an older quarter generally did not restart that quarter’s clock.

Do not read expired rows as safety. Section 7405 lets the government sue to recover a refund that should not have been paid, and Section 6532(b) gives it two years from the date of the refund, five where the refund was induced by fraud or misrepresentation of a material fact. In June 2026 a Mississippi federal district court let such a counterclaim proceed rather than confine the government to administrative recapture, while requiring specific pleading. That is one ruling on the pleadings, not settled law. A 2020 credit paid out in 2024 or 2025 still carries a tail.

One mechanical point. Section 70605(d) provides that, notwithstanding Section 6511, no credit under Section 3134 is allowed and no refund made after July 4, 2025 unless the claim was filed on or before January 31, 2024. Third and fourth quarter 2021 claims not refunded before enactment are dead, and that receivable comes off the model.

Law: 26 U.S.C. 7405, 6532(b), 6501(c), 6511; Pub. L. 119-21, sec. 70605(d). Case: Plastic Film, LLC v. United States, No. 5:25-cv-30-DCB-LGI (S.D. Miss. 2026).

What exactly will the buyer’s accountants ask about the ERC?

Diligence on the Employee Retention Credit is narrow and specific. The request list does not ask whether the company qualified. It asks which quarters were claimed, under which eligibility theory, on which return, for how much, and where the supporting documents are. The answers either exist in a file or they do not.

• The returns and the money. Each Form 941 or 941-X by quarter, the credit claimed, the filing date, refund dates and amounts, interest received, and anything still pending.
• The theory, quarter by quarter. Suspension by governmental order, gross receipts decline, or recovery startup status, with the specific order and its dates behind a suspension claim, and the 2019 comparison and any elective lookback behind a gross-receipts claim.
• The wage computation. Qualified wages by employee and quarter, wages excluded because used for Paycheck Protection Program forgiveness or another credit, and wages paid to majority owners and relatives.
• The preparer. Who computed the claim, the engagement letter, and whether that firm is reachable.

Guidance: IRS Notice 2021-20; Notice 2021-23; Notice 2021-49.

I ask for the Form 941-X and the text of the governmental order it depends on before I ask anyone whether the claim was good.

Which ERC eligibility theory did the claim use, and does it hold up?

Eligibility for the Employee Retention Credit was proved one quarter at a time. A company could qualify for one quarter and fail the next. There was no company-wide finding, no certificate, and no IRS approval built into payment of a refund. Payment means a check cleared processing. It does not mean the position was examined.

The suspension test has two parts under Notice 2021-20. There must be an order from an appropriate governmental authority limiting commerce, travel, or group meetings because of COVID-19, and that order must have fully or partially suspended operations. Partial suspension requires more than a nominal portion of operations; a modification requires more than a nominal effect. Essential-business status does not by itself defeat a claim, and a suspension during part of a quarter makes the employer eligible for that whole quarter. But note the limit promoters skipped: the credit then reaches only wages paid during the suspension period, not every wage in the quarter.

The gross-receipts test is arithmetic. It compares quarterly gross receipts to the comparable 2019 quarter, with a steeper decline required for 2020 than for 2021, and an elective lookback to the preceding quarter. It computes or it does not.

The supply-chain theory is the pressure point. IRS Chief Counsel worked through five supplier scenarios in Generic Legal Advice Memorandum AM 2023-005, released July 21, 2023. The narrow exception in Notice 2021-20 covers an employer whose supplier of critical goods was itself suspended by a government order, leaving the employer unable to obtain those goods anywhere. Delay and cost increases are not that. That memorandum is not precedent, but it shows how an examiner reads the file. Expect this theory to be tested.

Guidance: IRS Notice 2021-20, sec. III.D, Questions 11, 17, 18, 22, and its substantiation provisions; AM 2023-005; IR-2023-169; IRS ERC FAQs.

A refund received and spent is not proof of eligibility. It is an unresolved tax position with a clock still running.

Why does a disallowed credit also reopen my income tax year?

The credit and the wage deduction are linked by statute. CARES Act Section 2301(e) and Section 3134(e) both require the employer to reduce its deduction for wages by the amount of the credit claimed. Claiming the credit therefore changed an income tax return. Disallowing the credit changes it back, which is why the Act conformed the periods on both sides.

Run the sequence. The credit is claimed, the wage deduction comes down, income tax goes up. Years later the credit is disallowed and employment tax is assessed, with interest. The wages were always deductible, so relief should be owed on the income tax side, but only if the refund period is still open. The Act addressed that gap by conforming the Section 6511 period for a refund attributable to a wage deduction reduced because the credit was claimed. Confirm with your tax advisor that it reaches your quarters.

For a pass-through company this lands on the owner personally. An S corporation or partnership does not pay the income tax on the reduced deduction; the shareholders and partners do. A disallowed credit therefore reaches a personal return for a year you considered finished. IRS guidance updated March 20, 2025 also lets an employer that never reduced wage expense report the credit in the year received rather than amend. Confirm which approach the returns used; the buyer’s accountants will reconcile payroll filings to income tax returns.

Law: CARES Act sec. 2301(e); 26 U.S.C. 3134(e), 6511, as affected by Pub. L. 119-21, sec. 70605. Guidance: IRS ERC FAQs, “Income tax and ERC” (Mar. 20, 2025). Stated as of September 2026.

How will a buyer handle ERC exposure in the purchase agreement?

A buyer will rarely leave Employee Retention Credit exposure inside the ordinary indemnification package. The general indemnity is built for unknown breaches, sized to a cap and a basket, and set to survive a limited window after closing. A known claim with an assessment period running for years is neither unknown nor short. Expect separate treatment.

• A special indemnity outside the cap. Named as the credit claim, separately capped, surviving until the assessment period closes plus a tail, and outside the deductible.
• A dedicated holdback or escrow. Sized to the refund plus interest and potential penalties, released on the later of the assessment period closing or written IRS closure.
• Resolution before closing. A demand that the claim be withdrawn if unpaid, repaid, or supported by an independent analysis the buyer accepts.
• A purchase price adjustment. Treating the spent refund as a debt-like item in the definition of indebtedness, which takes it off the top of the proceeds.
• Pending-claim mechanics. If a refund is outstanding, the agreement must say who owns it, who signs what, and who controls an examination. Silence favors whoever holds the account.

Do not expect insurance to solve this. Representation and warranty insurance is uncommon on sales of this size, and where used it covers unknown breaches and excludes issues found in diligence.

Every one of those structures is a price. The question is whether you set it with a file in hand or let the buyer set it from outside.

What if the promoter is gone and there is no substantiation file?

A missing promoter file is a rebuildable problem, and rebuilding it is easier before diligence than during it. The substantiation the IRS describes is mostly documents that still exist somewhere: the governmental orders, payroll registers, quarterly gross receipts, Paycheck Protection Program forgiveness records, and the returns. What cannot be rebuilt is the reasoning.

Notice 2021-20 sets out substantiation and record retention expectations. Work quarter by quarter. Pull the order, pull the numbers, write down why this employer met the test that quarter and, for a suspension theory, which wages fall inside the suspension period. If the answer is that a marketing deck said the industry qualified, treat that quarter as exposed and price it.

Know the administrative landscape. As of September 2026, both rounds of the IRS Employee Retention Credit Voluntary Disclosure Program are closed; the second closed November 22, 2024. Withdrawal is available only in narrow circumstances: the adjusted return was filed solely to claim the credit, the whole credit is withdrawn, and the claim is unpaid or the check uncashed. A disallowance letter starts two clocks, the protest window stated in the letter and the two years under Section 6532(a) to sue, running from the mailing of that notice.

What should I do before the buyer’s accountants ask?

Rebuilding the Employee Retention Credit file is a multi-week project that belongs at the front of sale preparation, not in the middle of diligence. The goal is to know, quarter by quarter, which claims are strong, which are weak, and what the weak ones could cost, so the number in the agreement is one you chose.

• Build a schedule: each quarter claimed, the return and filing date, the amount claimed, the amount and date received, and the theory used.
• Calculate the assessment expiration for each quarter, and note any refund paid in the last two years.
• Collect documents while former bookkeepers and payroll providers still respond.
• Get an independent eligibility read from someone who did not prepare the claim, and reconcile payroll filings to income tax returns, including any owner’s personal return.
• Decide your reserve number before the letter of intent, and whether to fund escrow or fix a weak quarter.
• Tell your deal counsel early, and have the special indemnity, the release trigger, and the pending-refund mechanics drafted by you rather than proposed to you.

Tax rules here have changed more than once, and the positions above are stated as of September 2026. The structural point does not move. A credit claimed on a promoter’s theory and spent on the business is a contingent liability with a long tail, and the seller who documents it first prices it.