How to Litigate ERC Refund Claims: A Comprehensive Guide for Businesses

July 02, 2024

By Cheryl Frank, Tax Litigation Attorney

It is evident that small businesses will have to endure a prolonged wait for the IRS to process their refund claims. Many of our clients have inquired about the process and costs associated with suing the IRS to expedite their refunds.

During the moratorium, the IRS analyzed the data from paper ERC claims to assess eligibility risks. Initially, it was stated that approximately 90% of the claims could not be processed due to high-risk levels, but this estimate has since been revised.

The IRS has prioritized processing claims with the highest risk of ineligibility that were filed before the moratorium. These claims will receive notices of claim disallowance. Conversely, claims with the lowest risk of ineligibility, also filed before the moratorium, will be processed first, potentially resulting in full or partial disallowances. This is anticipated to occur over the summer.

In a press release on June 21, 2024, the IRS estimated that between 60% and 70% of the claims present an acceptable level of risk. They committed to conducting further analyses to improve compliance review, expedite the resolution of valid claims, and protect against improper claims.

Public concern is primarily focused on the legitimate claims of small businesses. Despite reports suggesting that 10% to 20% of ERC claims are low risk and should be processed quickly, the reality is different. The IRS has indicated that payments for these claims will begin late this summer, albeit at a slow pace due to the need for additional scrutiny.

The IRS will adjust claims with calculation errors before payment, focusing on the oldest claims first. Consequently, claims submitted during the moratorium will not be processed anytime soon. Previous press releases highlighted the prevalence of fraudulent claims, though recent communications have been less direct. The Criminal Investigation Division (CID) has initiated 450 criminal penalties for potential fraudulent claims totaling nearly $47 billion. Our practice has observed increased inquiries related to prosecuting those promoting fraudulent claims.

If your claim was filed before the IRS moratorium on September 14, 2023, and is considered low risk, it will be processed, with older claims receiving priority. Claims filed after the moratorium will face significant delays.

If your claim is not processed despite its age, it may indicate problematic issues, necessitating patience. The IRS has signaled the denial of tens of thousands of claims in the upcoming weeks. While some of these denials will be justified, there is a possibility that valid claims may also be denied.

For pending refund claims, there are limited options to expedite IRS processing before resorting to litigation. If you cannot wait for IRS action, filing a refund suit is the only alternative. Here are some common questions and answers about this process:

A refund or credit claim must be filed with the IRS per legal provisions, typically done using Form 941-X for ERC claims.

A refund suit can only commence six months after filing Form 941-X, unless the IRS denies the claim within that period, allowing immediate legal action. Given the IRS backlog, this waiting period is often unavoidable.

Refund suits can be filed in a federal district court where the plaintiff resides or where the corporation's principal business is located. Alternatively, suits can be filed in the U.S. Court of Federal Claims. Each court has distinct characteristics, which are beyond the scope of this discussion.

You will need a tax attorney experienced in refund litigation within federal district courts or the Court of Federal Claims. Some district courts require local counsel for filing complaints, necessitating experienced local representation.

Many inquiries pertain to Professional Employer Organizations (PEOs) filing refund claims. If a PEO files on your behalf, the IRS only communicates with the PEO, and your claim will be part of a larger claim on Schedule R of Form 941-X. While there is an argument for the PEO’s standing to file suit, this area of law is not well-developed.

Filing a refund suit is complex and involves finding an experienced attorney, filing a complaint, serving the government, and awaiting a response from the DOJ. This process is time-consuming and expensive, with no guarantees on government response times or discovery processes. A well-documented ERC eligibility analysis is crucial when drafting and filing a complaint. Each case is unique and challenging.

Taxpayers can recover attorney fees and costs within certain limits. It is advisable to consult a competent tax attorney to navigate these complexities and ensure proper legal strategy. Call one of the tax litigation specialists and former IRS attorneys at Brager Tax Law Group for a complimentary phone consultation if you are experiencing any issues related to Employment Retention Credits at 310-208-6200 or for more information visit www.bragertaxlaw.com.