The Employee Retention Credit (ERC) and the IRS are at the center of escalating legal disputes, with numerous lawsuits requesting reimbursements for this credit. Businesses who feel they are due large reimbursements under the ERC program, which was created to assist employers during the COVID-19 outbreak, are becoming increasingly irate, as evidenced by these examples. This litigation wave may be the start of a larger dispute between employers and the IRS over the agency’s handling of these claims as more businesses enter the fray.

One example is an Ohio-based industrial employment company that was forced to stop hiring during the pandemic because of regulatory regulations. According to a legal petition filed in September, the corporation is currently seeking a refund of more than $5 million in ERC claims. In a separate lawsuit, a North Carolina daycare center is requesting refunds totaling more than $394,000. These instances are not unique; rather, they are a part of a broader pattern in which employers are challenging the IRS’s handling of ERC claims in court.

What is the problem with the ERC

There has been a lot of misunderstanding and annoyance surrounding the ERC, which was implemented to assist companies in keeping workers during pandemic-related shutdowns. The enormous volume of claims has been difficult for the IRS to handle, resulting in a sizable backlog. After years of delays for many employers who filed for the credit, thousands of companies are suddenly receiving notices that their claims have been denied. The issue is made worse by the IRS’s admission that some of the denial letters were sent in error, trapping numerous companies in a red tape maze while they attempt to get back the money they think they are due.

The IRS’s handling of ERC claims is one of the main causes of these court cases.The ERC was created as a refundable tax credit to encourage companies to continue paying their employees during COVID-19 shutdowns. However, proponents’ aggressive marketing, which promised simple access to these credits, deceived some businesses. This resulted in an increase in claims, many of which were fraudulent or inaccurate. Approximately 1.4 million ERC claims were backlogged at one point, according to a report by the National Taxpayer Advocate.

The IRS is still having trouble clearing the backlog even though it recently started processing these claims again after a one-year break. Employers have even been invited to join a Voluntary Disclosure Program, which gives them the chance to make inexpensive corrections to their ERC claims. Even with these efforts, a lot of businesses are still not happy. According to some, they have not even received a formal notice of disallowance or an explanation for the delay, which are essential pieces of information regarding the status of their claims.

The impact of the IRS delays

The Job Center LLC, an industrial employment company in Ohio, is suing the IRS for almost $5.1 million in unpaid ERC refunds. The lawsuit claims that under the clause pertaining to government shutdowns, the corporation is eligible for retention credits for five fiscal quarters in 2020–2021. According to the corporation, the pandemic compelled it to adjust its operations in several locations in order to adhere to local, state, and federal regulations, which interfered with regular business operations such as hiring events, group meetings, and travel. The company claims that although though it filed for these refunds in June 2023, the IRS has not issued any formal disallowances, audits, or deficiency warnings, nor has it offered an explanation for the delay. As a result, The Job Center LLC is requesting interest and legal fees in addition to the repayment of the outstanding credits.

Similar proceedings are underway in North Carolina, where a daycare called The Learning Tree, run by Miss Marta’s Inc., is suing the IRS for more than $394,000. The daycare argues that a notable drop in gross receipts over six fiscal quarters between 2020 and 2021 qualifies it for the ERC. The company claims that although it submitted updated forms on time, its claim was rejected without examination after the IRS halted processing. According to the complaint, the IRS has allegedly suspended the program by delaying processing ERC claims to such a degree.

TheIRS has provided a number of justifications for the delays in response to these and other litigation.Deputy Commissioner Douglas O. Donnell confirmed that a record number of claims, many of which were ineligible, were received by the department. Additionally, he noted that the intricacy of many claims necessitated manual reviews by IRS personnel, which added to the delay. In order to manage the increase in claims, the IRS also needed to devote more resources.