An increasing number of lawsuits are being filed against the IRS and the Employee Retention Credit (ERC), and many people are requesting refunds related to this credit. The ERC program was created to assist companies during the COVID-19 outbreak, and businesses are becoming increasingly irate because they believe they are entitled to large rebates.

As more businesses join the battle, this legal tsunami may be the beginning of a larger dispute between employers and the IRS regarding the agency’s handling of these claims.

In this instance, the government placed restrictions on recruiting during the pandemic, forcing an industrial staffing company in Ohio to cease operations. According to a September court filing, the business is currently attempting to recoup almost $5 million in ERC claims.

Another lawsuit is being filed by a North Carolina daycare center, this time for more than $394,000 that it claims is owed. These cases are not unusual; rather, they are a part of a larger pattern in which employers are challenging the IRS’s handling of ERC claims in court.

What is the problem with the ERC

Many people are confused and angry about the ERC, which was created to help businesses retain employees when they had to close due to a pandemic. There is a significant backlog because the IRS has struggled to keep up with the enormous volume of claims. Many companies have had to wait years for their claims to be processed after requesting the credit.

Notices that their claims have been rejected are now being sent to thousands of businesses. The IRS has acknowledged that some of the rejection letters were accidentally sent, which has made the situation worse. Many firms are struggling to collect the money they believe they are entitled to as a result of this.

The IRS’s handling of ERC claims is one of the reasons for getting into these litigation. In order to incentivize businesses to retain their employees during COVID-related shutdowns, the ERC was developed as a refundable tax credit. However, several firms were misled by aggressive marketing by promoters who claimed that obtaining these points would be simple.

This led to several claims, many of which were fabricated or untrue. The National Taxpayer Advocate once claimed that the IRS has over 1.4 million ERC cases backlogged.

After a year-long hiatus, the IRS has only recently resumed its work on these claims, but the agency is still struggling to catch up. In order to correct their ERC claims at a reduced cost, employers have even been encouraged to enroll in a Voluntary Disclosure Program.

Despite all of these efforts, many businesses continue to be dissatisfied. A few people have complained that they haven’t even received basic information regarding the status of their claims, such as an explanation for the delay or a formal notice that their claims were rejected.

The impact of the IRS delays

The Job Center, an Ohio business, is suing the IRS over unpaid back ERC refunds of $5.1 million. For five fiscal quarters in 2020 and 2021, the corporation is expected to receive retention credits under the section of the case that addresses government shutdowns.

The company claims that in order to comply with local, state, and federal regulations, the pandemic forced it to alter its business practices in a number of states. This interfered with regular corporate operations, such as hiring events, group meetings, and travel.

Despite filing for these refunds in June 2023, the company claims that the IRS has not provided an explanation for the delay or issued any formal letters of disallowance, audit, or deficiency. Therefore, The Job Center LLC is requesting more than simply the owed credits. They also want interest and legal fees.

In a case like this, the IRS is suing Miss Marta’s Inc., a daycare center called The Learning Tree, for over $394,000. The daycare claims that because its gross receipts decreased significantly over the course of six fiscal quarters in 2020 and 2021, it is qualified for the ERC.

The business claims that despite timely filing of amended forms, the IRS ceased processing its claim, which resulted in its rejection without examination. According to the complaint, the IRS has effectively shut down the ERC program by slowing down the processing of ERC claims.

The IRS has provided a number of explanations for the delays due to these and other cases. Douglas O. Donnell, the deputy commissioner, acknowledged that the office was receiving a large volume of claims, many of which were invalid.

He said that the delay was increased by the fact that some claims were so complex that IRS staff had to review them by hand. To handle the high volume of cases, the IRS also needed to hire more employees.