With the IRS showing no sign of lifting its moratorium on processing Employee Retention Tax Credit (ERC) claims filed after September 14, 2023, businesses whose unpaid, legitimate ERC claims are older than six months should consider filing a refund lawsuit.
The mounting backlog of unprocessed claims is likely to significantly delay payment, which could cause financial strain for businesses that were counting on the credit.
Businesses facing financial hardship that clearly qualified for the ERC and have robust documentation should look into filing a refund lawsuit to accelerate payment of their claims. Some ERC claimants have already begun taking the IRS to court.
Background on the ERC
The ERC is a legitimate, refundable tax credit designed to help businesses that continued to pay employees while they were shut down because of the COVID-19 pandemic or that experienced a significant decline in gross receipts in 2020 or 2021. While Congress designed the ERC with the laudable goal of helping businesses survive the pandemic by encouraging them to keep employees on the payroll, ERC fraud has run rampant and unscrupulous promoters have pushed businesses that do not qualify for the credit to file improper claims. For almost two years, the IRS has engaged in a concerted effort to stamp out fraudulent ERC claims.
Moratorium on Processing New Claims Continues
As part of that effort, the IRS placed a moratorium on processing ERC claims filed after September 14, 2023. The moratorium provided the IRS with time to add additional safeguards to prevent refunds being paid to ineligible businesses and to combat aggressive ERC marketing by promoters. We previously wrote about the moratorium here. In April 2024, the IRS announced the moratorium would continue but that it may decide “in late spring” when to resume processing claims. The moratorium was an initial, defensible step to stem the vast amount of ERC fraud, but now businesses that legitimately qualified for the ERC and filed ERC claims are stuck in limbo. Some businesses are struggling financially, and receiving an ERC refund could make the difference between being able to operate or shutting down.
Tax consultants are also frustrated with the moratorium because many of their clients agreed to pay fees contingent on receiving ERC refunds. In fact, at least one consultant has filed suit to enjoin the IRS from continuing its moratorium on processing ERC claims. There is no way to know when the IRS will lift the moratorium, but even when it does, a giant backlog of ERC returns will remain. It will likely take the IRS many months, if not years, to pay legitimate claims, deny fraudulent claims, and audit a subset of suspect claims.
Refund Lawsuits
Some businesses that filed Forms 941-X to claim ERC refunds and are awaiting payment are losing patience with the IRS’ slow processing of claims and have begun filing lawsuits in federal court demanding payment. The Internal Revenue Code allows taxpayers to file refund suits against the United States if their refund claim remains unpaid at least six months from the filing date if they have not received a notice disallowing the refund. Taxpayers may file lawsuits in the U.S. district court where the employer has its principal place of business or in the Court of Federal Claims.
Because the IRS is only processing returns filed before September 15, 2023 and doing so at a glacial pace, ERC claimants are unlikely to receive refund checks while the moratorium is in place. Businesses that clearly qualified for the ERC and have robust documentation should consider filing a refund suit, especially if they qualified under the more straightforward gross receipts test and filed amended income tax returns to reduce their wage expense. Although filing a lawsuit creates litigation expenses, filing a refund suit may be a better option for some companies than borrowing against a refund claim or waiting for the IRS to process the claim in a backlog of, reportedly, more than a million unprocessed claims. Instead of charging hourly rates, law firms may agree to accept a fee contingent on the outcome of the case or another alternative fee arrangement. Although rare, it may be possible to recover all or part of attorneys’ fees and costs if the refund suit is successful. Businesses in sound financial condition that filed ERC claims and are waiting for refund checks should consider continuing to wait for the moratorium to be lifted as their claims are currently earning interest at 8% per year.
The Takeaway
Businesses that clearly qualified for the ERC and have robust documentation to support their credit should consider filing a refund suit while the IRS moratorium on processing most ERC claims continues and backlog of unprocessed returns continues to grow. All ERC claimants should consult with a trusted tax professional to review their eligibility and consider their refund options.
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