Thousands of Americans are suing the IRS over tax refunds – Here’s how this could impact you

The Employee Retention Credit (ERC) was created as a lifeline for businesses during the COVID-19 pandemic, offering substantial tax credits to help employers retain their workforce during challenging times. However, recent legal battles between businesses and the IRS highlight growing frustrations with the program.

Several companies are now suing the IRS, seeking millions in refunds they believe are owed under the ERC. These lawsuits point to delays, claim disallowances, and administrative challenges that have left many businesses stuck in bureaucratic limbo.

ERC

The ERC was introduced as part of the CARES Act to support employers facing pandemic-related shutdowns and financial losses. Businesses were eligible to claim up to $5,000 per employee in 2020 and $7,000 per employee per quarter in 2021.

However, the IRS has struggled to manage the sheer volume of ERC claims, leading to backlogs and long delays. Currently, many businesses have been waiting years for refunds, and thousands of claims have been disallowed, with the IRS admitting that some rejections were made in error.

A key issue behind these legal disputes is the IRS’s handling of ERC claims. Some businesses were misled by aggressive third-party promoters who promised easy access to the credits, resulting in a flood of claims, many of which were either erroneous or fraudulent. The National Taxpayer Advocate reported that the IRS had a backlog of 1.4 million ERC claims, a situation exacerbated by the agency’s year-long pause on processing the credits.

Ongoing Lawsuits

One of the largest cases involves The Job Center LLC, an industrial staffing company based in Ohio, which is suing the IRS for $5.1 million in unpaid ERC refunds. According to their lawsuit, The Job Center is owed retention credits for five fiscal quarters between 2020 and 2021 due to government-imposed restrictions that disrupted their business operations.

The company filed for these credits in June 2023, yet the IRS has failed to process the claims, issue disallowance notices, or provide any explanation for the delay. The company is now seeking payment of the refunds, along with interest and attorney fees.

In North Carolina, a daycare called Miss Marta’s Inc., operating as The Learning Tree, has filed a similar lawsuit seeking over $394,000 in ERC refunds. The daycare claims that due to a significant decline in gross receipts during six fiscal quarters between 2020 and 2021, it qualifies for the ERC.

However, its claim was disallowed without review after the IRS halted the processing of ERC claims. The lawsuit alleges that the IRS’s failure to process claims in a timely manner has effectively “suspended the program,” leaving many businesses without crucial financial relief.

Company	Amount Claimed	Reason for Claim	Current Status
The Job Center LLC	$5.1 million	Business disruptions due to COVID-19 restrictions	Lawsuit filed, seeking refunds
Miss Marta’s Inc.	$394,000	Significant decline in gross receipts during the pandemic	Lawsuit filed, seeking refunds

Backlog Issues

The IRS has acknowledged the significant backlog and delays in processing ERC claims. Deputy Commissioner Douglas O’Donnell stated that the agency was overwhelmed by an unprecedented volume of claims, many of which required manual review due to their complexity. Some of the delays have been attributed to the need for additional IRS resources to handle fraudulent or ineligible claims that were submitted during the pandemic.

Despite resuming ERC processing after a year-long pause, the IRS continues to struggle with clearing the backlog. To address concerns, the IRS has introduced a Voluntary Disclosure Program, encouraging businesses to correct any errors in their ERC claims at a reduced cost. This initiative aims to weed out fraudulent claims while offering legitimate claimants a chance to amend their filings without severe penalties.

Impact

The delays in processing ERC claims have had a significant financial impact on businesses that rely on these refunds for cash flow. For companies like The Job Center and Miss Marta’s Inc., the inability to access their ERC refunds has caused additional strain, particularly in industries already hit hard by the pandemic.

The legal actions being taken by these companies represent a broader movement among businesses that feel they’ve been unfairly left in the dark. Many claim they have yet to receive even basic information about the status of their claims, such as formal notices of disallowance or explanations for delays. This uncertainty has led some businesses to turn to the courts in hopes of recovering the money they are owed.

What’s Next

As these legal battles intensify, they raise important questions about the IRS’s capacity to handle large-scale relief programs like the ERC. While the outpouring of claims during the pandemic may have been unprecedented, businesses are increasingly frustrated with the lack of communication and transparency from the agency. Some employers worry that these lawsuits could lead to even longer delays as the IRS shifts resources to defend against legal claims.

For now, businesses are advised to monitor the status of their claims closely and consider consulting tax professionals to navigate the ERC process, especially as the IRS continues to sort through the remaining backlog.

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