Tax Law Center Blog

The Employee Retention Tax Credit (ERC) was established to provide financial relief to businesses affected by the COVID-19 pandemic. However, numerous companies are still awaiting their ERC refunds due to prolonged IRS processing times. With no statutory deadlines compelling the IRS to expedite these refunds, many businesses are facing financial uncertainty and opting to file ERC refund lawsuits to compel payment.

Eligibility to File an ERC Refund Lawsuit

To initiate an ERC refund lawsuit, a business must meet the following criteria:

• The business must have properly submitted an ERC claim through Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return).
• At least six months must have passed without receiving the refund or a formal denial.

When to Consider Filing an ERC Refund Lawsuit

Businesses may consider pursuing litigation if they meet the following conditions:

• The ERC claim exceeds $500,000.
• The business relies on a physical location or human capital to produce goods or services.
• The business was adversely affected by government COVID-19 orders, particularly if there was a revenue decline exceeding 10% or a disruption in the production of goods or services.
• The business can substantiate the impact through financial records and data.

Filing an ERC Refund Lawsuit

Businesses that have not received a refund after six months may file a lawsuit in either the Court of Federal Claims or a federal district court. This option is particularly viable for substantial claims backed by strong factual and legal documentation, especially where eligibility is based on a decline in gross receipts.

Unlike other tax disputes, refund litigation is handled by the Department of Justice, not the IRS. This distinction may work to the taxpayer’s advantage, as DOJ litigation typically progresses at a more predictable pace than IRS processing. However, the cost of litigation and the time commitment should be carefully considered, particularly in cases involving complex, fact-specific claims.

Potential Outcomes of ERC Refund Lawsuits

The Department of Justice has resolved these cases promptly, given the increasing volume of claims and the potential for significant legal exposure. This environment may incentivize the government to settle cases more quickly than usual, allowing businesses with well-documented claims to advance their cases more effectively.

Evaluating Next Steps for Taxpayers Awaiting ERC Refunds

Taxpayers who are still waiting for their ERC refunds should carefully assess the strength of their claims and explore their available options. For some, initiating a refund lawsuit may provide a strategic opportunity to circumvent the prolonged IRS backlog. Consulting with a tax attorney can help taxpayers weigh the costs and benefits of litigation and evaluate alternative strategies for resolving pending ERC claims.