The Internal Revenue Service (IRS) is presently the subject of numerous lawsuits due to the delays in processing Employee Retention Credit (ERC) claims. Several businesses throughout the United States are requesting millions in tax refunds.
The accumulation of ERC claims, which dates back to the pandemic, has been the source of a multitude of challenges that have been revealed by these legal battles.
The latest information on this ongoing issue will be provided in this article, which will explore the reasons behind the delays, the businesses that have been impacted, and the lawsuits that have been filed.
What is the Employee Retention Credit (ERC)?
In 2020, the ERC was implemented as part of the CARES Act to assist businesses in maintaining their workforce during COVID-19 shutdowns. It enabled eligible employers to claim a refundable tax credit for compensation provided to employees during the pandemic.
At first, the program was a reprieve for numerous businesses; however, due to processing delays, erroneous rejections, and fraud allegations, it has since become a source of frustration.
The Internal Revenue Service is currently experiencing an abundance of ERC claims
The IRS experienced a substantial backlog as a result of the overwhelming volume of ERC claims it received. The IRS had approximately 1.4 million pending claims as of mid-2024, with a significant number of them designated for manual review due to concerns regarding eligibility and potential fraud.
The agency has been making efforts to resolve this matter; however, businesses have grown increasingly dissatisfied with the IRS’s lack of communication and extended wait periods.
Many businesses, particularly those that depended on the ERC to remain operational during the pandemic, are currently pursuing legal action against the IRS because of the delayed refunds. An important concern is that certain claims have been denied without a clear justification, necessitating that businesses pursue legal action.
The ERC Delays Have Incited Significant Lawsuits
1. Industrial Staffing Company Located in Ohio
The Job Center LLC, an industrial staffing company located in Ohio, is the subject of one of the most significant lawsuits. The IRS is being sued by the company for $5.1 million in owed ERC refunds. The Job Center submitted claims for five quarters between 2020 and 2021 under the “government shutdown” provision, as per the lawsuit.
However, the IRS did not issue any refunds or notices of disallowance. The company claims that the delays have resulted in substantial financial losses and is requesting refunds as well as additional recompense for attorney fees and interest.
2. North Carolina Daycare Center
Miss Marta’s Inc., a daycare center in North Carolina that operates as The Learning Tree, is challenging the IRS for over $394,000 in ERC refunds. The daycare submitted amended returns to claim the credit for six quarters; however, it was denied without providing an explanation.
The Learning Tree contends that it was eligible for the credit under the “gross receipts” provision and that the IRS’s neglect to process the claim is unlawful. In an effort to recoup the funds that are owed, the daycare is currently pursuing legal action.
3. Response of the Internal Revenue Service to the Backlog and Lawsuits
The IRS has recognized the challenges and delays associated with the high volume of ERC claims. The backlog was primarily caused by the complexity of numerous cases and the “unprecedented surge” in claims, according to IRS Deputy Commissioner Douglas O’Donnell.
The agency has implemented a variety of measures to resolve the matter, such as criminal investigations into potential ERC fraud, disallowance letters for high-risk claims, and additional audits. In the past few weeks, the IRS has processed approximately 28,000 disallowance letters, thereby preventing up to $5 billion in potentially improper payments.
Nevertheless, the agency has also identified 50,000 valid claims and is currently working to expedite payments to these enterprises. The IRS has underscored its dedication to safeguarding taxpayers from fraudulent claims and ensuring that legitimate claims are processed.
How to File a Refund Lawsuit Against the IRS
There are legal alternatives available to businesses that are encountering comparable complications with ERC claims. Businesses are required to submit a claim for a refund using Form 941-X to the IRS prior to filing a lawsuit.
Businesses may submit a tax refund lawsuit if the IRS denies the claim or fails to respond within six months. Businesses have 30 days to appeal the decision or submit a lawsuit upon receiving a notice of disallowance.
It is crucial to emphasize that businesses must act promptly to protect their rights after a claim is denied. It is advisable to consult with a tax attorney, as the process of filing a lawsuit can be both time-consuming and costly.
Businesses are requesting millions in refunds, and the IRS is currently confronted with a surge in litigation due to delays in the processing of ERC claims. Although the agency has made progress in reducing the backlog, numerous businesses are still awaiting their refunds, which has resulted in legal action and frustration.
It is uncertain how many of these cases will be resolved in court as the IRS continues to process the claims. Legal action may be the sole method for businesses that have been impacted by these delays to recoup their owed funds.
