The Employee Retention Credit (ERC), a key COVID-era relief measure, has faced persistent processing delays since its inception, leaving many taxpayers unsure about their claim status. If you are considering litigation to recover an ERC refund, timing matters: several deadlines can be triggered by:
- When you file your refund claim and
- Whether (and when) the IRS mails a formal notice disallowing the claim.
What we know now
Taxpayers who have filed ERC claims via Form 941-X may encounter extended wait times, both for initial responses and throughout the appeals process. Some have received either a Letter 105-C (Disallowance) or Letter 106-C (Partial Disallowance), which starts a two-year period to file a refund suit. Below is a checklist for any taxpayer who wishes to file a civil action suit:
- An administrative refund claim must be filed within three years from the time the return was filed or two years from the time the tax was paid, whichever is later. If this deadline is missed, the taxpayer loses their right to sue for a refund. Suits or proceedings will not be maintained in any court for the recovery of any internal revenue tax (IRC §7422).
- If a refund claim has been timely filed, the taxpayer has to wait six months from the date the claim was filed, OR the date the IRS formally denies the claim, before filing a law to suit to recover their claim. (§6532(a)(1)).
- If the taxpayer did receive a formal disallowance notice denying their refund claim, a lawsuit must be filed before the expiration of two years from the date the disallowance notice is mailed to the taxpayer. (§6532(a)(1)).
- The complaint in the lawsuit cannot substantially vary from the grounds of the administrative claim for refund. This applies to both the refund amount, and the facts and argument supporting the claim.
- The proper party, the taxpayer, or authorized successor, must sue the United States, and in the appropriate forum, either the District Court or the U.S. Court of Federal Claims.
What remains unclear
IRS processing times and communications on ERC claims can vary widely. The resolution process has strict deadlines that cannot be missed without the taxpayer forfeiting their right to their claim. The risk of losing eligibility for the credit while appeals are pending is a real concern and the rules may differ depending on a taxpayer’s circumstances.
What’s next
Aprio advisors can help taxpayers mitigate risk by:
- Preserving all available avenues for recovery on otherwise valid claims.
- Advising on all options available to the taxpayer as well as the rules and limitations surrounding those options.
- Determining whether the taxpayer has received a Letter 105-C or 106-C and make note of the date on any such letter to preserve refund eligibility.
In the business world, two years can pass quickly and preparing and filing a lawsuit takes time. Aprio’s Employee Retention Credit Audit & Controversy Services team can help you be proactive and make informed decisions.