BUSINESS - By late 2023, the IRS had processing moratoriums and automated filtering systems in place that had seen over a million ERC claims languish in limbo. Many companies that filed valid, properly documented claims received no response at all. Others received denial letters with no real explanation.
The Employee Retention Credit Refund Litigation is the federal legal process that helps businesses bypass this administrative bottleneck entirely. When you file a refund lawsuit, your claim is removed from the IRS backlog and placed in the federal court system, where objective legal rules apply, and a judge determines the outcome. Here’s what all business owners should know about this procedure:
Grounds for Filing a Federal Refund Lawsuit
You don’t have to wait forever for the IRS to process your amended payroll tax return (Form 941-X
- The 6-month trigger: If the IRS does not issue a final decision within six months of receiving the claim, a business can file a refund lawsuit in federal court, pursuant to IRC § 6532(a)(1).
- What changes: When you file suit, your case will move from the IRS to the Department of Justice Tax Division, where an assigned attorney will review your documentation according to standard federal evidentiary rules, not the automatic filters of the IRS.
Letters of Mass Disallowance
To clear its backlog, the IRS is mailing hundreds of thousands of disallowance letters (Letters 105C and 106C) to businesses nationwide. The Taxpayer Advocate Service has repeatedly criticized the agency for issuing denials without individual review.
The 2-Year Deadline
IRC § 6532 starts a strict two-year clock on issuance of a disallowance letter. If your business does not sue for the federal refund within that window, the right to claim the refund is lost forever.
Why Internal Appeals Don’t Work
An administrative appeal within the IRS does not toll the two-year statute of limitations. The Taxpayer Advocate says many businesses are on the brink of losing their rights before the IRS even completes its review due to processing delays. Often, the only way to preserve your claim is with a federal lawsuit.
Where Are ERC Lawsuits Brought?
ERC refund cases are not available in state courts or in the U.S. Tax Court. Businesses have two federal venues available because payroll taxes must be paid before a refund can be sought through litigation.
District Courts (U.S.)
You file in the federal judicial district where your business is located or doing business. This also provides the option of a jury trial, which can be an advantage in cases where the financial evidence is clear-cut.
Court of Federal Claims
The court in Washington, D.C., hears claims for money against the federal government. It’s often used by mid- to large-sized businesses because of its expertise in complex federal tax disputes.
What Are the Evidentiary Standards in Federal Court?
The business bears the burden of proof when a lawsuit is filed. Your legal team will have to document clearly one of two eligibility tracks.
- The gross receipts track: Your attorneys are required to produce accounting records showing a 50% decrease in revenue in 2020 or a 20% decrease in revenue in 2021, relative to the same calendar quarter during 2019.
- The government orders track: If you qualify under operational disruptions, your legal team needs to identify the specific binding government health order that restricted your operations and demonstrate that it had a more than nominal effect on your business activities.
- Credit separation: Your attorneys also have to prove that qualified wages used for ERC calculation did not overlap with wages covered by forgiven PPP loans or other pandemic-related credits.
Strict rules of evidence are applied in federal courts, but they also provide a fair and transparent process. On the IRS administrative track, automated systems can issue unexplained denials, but a federal judge weighs the evidence and issues a binding decision.
Conclusion
ERC refund litigation offers a business a structured and accountable way to navigate the IRS backlog. When your claim has been languishing for months, or you have received a mass disallowance letter, filing a federal refund lawsuit will bring your claim before a decision-maker who will review the facts. The key to getting what's rightfully yours if your business has a claim at stake is to understand these legal options early on.
