IRS Updates OBBB Guidance: ERC Refund Limits and Gig Economy Reporting Changes Create New Compliance Issues
The IRS has updated its guidance on tax changes under the One, Big, Beautiful Bill Act, including two areas that are likely to generate taxpayer confusion and controversy: limitations on Employee Retention Credit refund claims and changes affecting gig economy workers and Form 1099-K reporting.
For many taxpayers, these updates are not simply technical. They affect whether a business can still receive an ERC refund, how a taxpayer should respond to an IRS disallowance letter, and whether income received through payment apps or online platforms must be reported even when no information return is issued.
ERC Claims for the Third and Fourth Quarters of 2021 Face New Limits
The Employee Retention Credit remains one of the most heavily scrutinized pandemic-era tax benefits. The IRS has spent the last several years reviewing, delaying, disallowing, and auditing ERC claims, particularly where claims were filed by promoters or supported by generalized eligibility theories.
The OBBB added another significant limitation. Under the IRS’s updated guidance, ERC credits and refunds claimed for the third and fourth quarters of 2021 may be barred if the claim was filed after January 31, 2024. This is especially important for employers that filed Forms 941-X late, relied on third-party ERC firms, or have pending refund claims that have not yet been paid.
The IRS has clarified that the limitation applies to new ERC claims for the third and fourth quarters of 2021 filed after January 31, 2024. The IRS has also stated that a claim may be treated as timely filed if it was postmarked and properly mailed or submitted to the appropriate IRS office by that deadline.
That means the filing record may now be just as important as the substantive ERC eligibility analysis. For a business disputing an ERC denial, proof of timely filing may include certified mail records, tracking confirmations, proof of delivery, IRS account transcripts, payroll tax return filing records, and copies of the submitted Forms 941-X.
Letter 105-C Should Not Be Ignored
Businesses whose ERC claims are disallowed may receive IRS Letter 105-C, Claim Disallowed. A Letter 105-C is not just a routine notice. It may trigger important deadlines and procedural choices. If the IRS disallows an ERC claim as untimely under the OBBB limitation, the taxpayer should carefully review whether the IRS has correctly determined the filing date. If the business filed before January 31, 2024, or timely mailed the claim before that date, the response should focus on proving timely filing and preserving appeal rights.
A taxpayer may have the right to pursue review with the IRS Independent Office of Appeals. However, the strength of that appeal may depend on whether the taxpayer can provide documentation showing the claim was filed, mailed, or properly submitted on time. Taxpayers should also be prepared to support ERC eligibility on the merits because the IRS may continue reviewing other grounds for disallowance.
In practice, an ERC dispute may involve two separate questions: first, whether the claim was timely filed under the OBBB limitation; and second, whether the employer actually qualified for the ERC for the relevant quarter. Both issues should be analyzed before submitting a response.
Gig Economy Workers Still Must Report Income, Even if Form 1099-K Reporting Is Reduced
The IRS’s OBBB guidance also addresses gig economy workers and Form 1099-K reporting. The OBBB restored the Form 1099-K reporting threshold for third-party settlement organizations, such as payment apps and online marketplaces, to the pre-American Rescue Plan Act threshold: more than $20,000 in payments and more than 200 transactions during the calendar year. This change may reduce the number of Forms 1099-K issued to lower-volume sellers, freelancers, and gig workers. However, it does not change the underlying rule that taxable income must be reported whether or not the taxpayer receives a Form 1099-K, Form 1099-NEC, Form 1099-MISC, or any other information return.
That distinction is important. Some taxpayers mistakenly assume that income is not taxable if no Form 1099 is issued. The IRS has made clear that the reporting threshold affects third-party platform reporting obligations; it does not create an exclusion from income. For gig workers, sellers, independent contractors, and small businesses that receive payments through apps or platforms, the better practice is to maintain independent records of gross receipts, refunds, fees, chargebacks, business expenses, mileage, equipment purchases, and platform statements. Taxpayers should not rely solely on Forms 1099-K to determine taxable income.
The OBBB Also Affects Business Deductions and Recordkeeping
The IRS guidance also notes that gig economy workers may benefit from other OBBB changes, including 100% bonus depreciation for certain qualifying business property acquired after January 19, 2025. This may be relevant for taxpayers who purchase vehicles, computers, tools, or other property used in a business. But these deductions are record-sensitive. Taxpayers should document business use, acquisition dates, placed-in-service dates, cost, financing, receipts, and personal-use allocation. For vehicles and mixed-use property, contemporaneous records can be critical if the IRS later questions the deduction.
The practical point is that the OBBB may create opportunities, but it also creates audit risk when taxpayers claim deductions without adequate substantiation.
Why These Updates Matter for Tax Controversy
The IRS’s OBBB updates are likely to produce several categories of disputes.
For ERC claims, the disputes may involve whether a refund claim was timely filed, whether the IRS properly applied the new statutory limitation, whether the taxpayer preserved appeal rights, and whether the taxpayer can prove substantive ERC eligibility.
For gig economy workers, disputes may involve unreported income, mismatches between platform records and tax returns, inadequate expense substantiation, worker classification issues, and failure to properly report self-employment tax.
For small businesses, the common theme is documentation. Taxpayers should preserve filing proof, platform statements, payment processor records, bank deposits, Forms 1099, invoices, receipts, mileage logs, and correspondence with return preparers or ERC consultants.
Practical Steps for Taxpayers
Businesses with pending ERC claims for the third or fourth quarter of 2021 should immediately confirm when each claim was filed and whether proof of mailing or submission is available. If the IRS issues Letter 105-C, taxpayers should review the stated reason for disallowance, evaluate appeal rights, and should also consider obtaining an independent review of the claim, especially before filing an appeal, or amending related income tax returns.
Gig economy workers and small businesses should not assume that fewer Forms 1099-K means less taxable income. They should continue to reconcile platform payments to bank deposits, separate business and personal activity, and maintain records supporting both income and deductions.
Taxpayers who relied on an ERC promoter or third-party preparer should also consider obtaining an independent review of the claim, especially before responding to an IRS notice, filing an appeal, or amending related income tax returns.
The Bottom Line
The IRS’s updated OBBB guidance highlights a broader trend: tax benefits may be available, but the IRS is increasingly focused on procedural compliance, documentation, and substantiation. For ERC claims, the filing date may now determine whether a refund is available at all. For gig economy workers, reduced Form 1099-K reporting does not eliminate the obligation to report income. For businesses claiming deductions under the new law, records remain essential. Taxpayers facing an ERC disallowance, refund claim issue, Form 1099-K reporting problem, or IRS notice should evaluate both the substantive tax rules and the procedural posture before responding.
The Karam Firm, PLLC assists taxpayers with IRS audits, refund claims, ERC disputes, penalty matters, tax controversy strategy, and federal and state tax compliance issues.
Disclaimer
This article is for general informational purposes only and does not constitute legal, tax, accounting, or other professional advice. Reading this article does not create an attorney-client relationship with The Karam Firm, PLLC or any of its attorneys. Tax laws and IRS procedures change frequently, and the application of those rules depends on the specific facts and circumstances of each taxpayer. Taxpayers should consult qualified counsel before responding to an IRS notice, filing an appeal, amending a return, submitting a refund claim, or taking any tax position.
