What Are PEOs and Why Do They Complicate ERC Claims?
A Professional Employer Organization (PEO) is a third-party provider that handles payroll, HR, and tax filings for small and mid-sized businesses. While PEOs can simplify back-office operations, they create complications when it comes to Employee Retention Credit (ERC) claims.
In a typical PEO setup, the PEO files Form 941 or 941-X under its own EIN and includes a Schedule R to allocate credits among client companies. This means the business itself is not the direct filer of the claim — the PEO is.
The Legal and Financial Risks of ERC Claims Through PEOs
As IRS scrutiny increases in 2025, businesses that filed ERC through PEOs face several risks:
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Delayed or Denied Refunds: You may not even know the status of your claim because the IRS contacts your PEO, not you.
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IRS Clawbacks: If your PEO misfiled, misrepresented eligibility, or improperly allocated funds, the IRS may demand the refund back — with penalties and interest.
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Loss of Legal Standing: Because the PEO files under its EIN, it may be unclear whether your business has direct standing in a refund dispute — unless litigation clarifies it.
How ERC Litigation Can Protect Businesses Using PEOs
When your ERC claim is unpaid, delayed, or clawed back — and a PEO is involved — litigation may be your strongest tool to recover your funds or resolve your liability.
1. Filing a Refund Lawsuit Against the IRS
If the IRS fails to pay your refund within 6 months or denies it outright, you may sue under 26 U.S.C. § 7422 in the U.S. District Court or Court of Federal Claims. Even if the PEO filed the original return, your business may still be considered the injured party if you can prove rightful entitlement to the credit.
2. Holding the PEO Legally Accountable
If the PEO mishandled your ERC claim, you may also pursue civil litigation for breach of contract, negligence, or conversion. Courts can award damages for financial harm caused by a PEO’s misconduct or failure to file properly.
Common Litigation Issues in PEO-Filed ERC Cases
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Schedule R Errors: Incomplete or inaccurate credit allocation among clients
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Lack of Substantiation: Missing documentation that PEOs failed to collect or submit
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Unauthorized Filing: Some PEOs submitted ERC claims without the client’s knowledge or consent
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Withheld Refunds: PEOs that received ERC refunds but failed to disburse them to the business owner
Protective Steps Your Business Can Take
1. Demand All ERC Documentation
Request copies of your Form 941 or 941-X, Schedule R, payroll records, and IRS correspondence from your PEO. You have a right to this data.
2. Review Your PEO Agreement
Examine the language around tax filings, indemnification, and dispute resolution. Many PEO contracts are vague or one-sided — but they can still be challenged in court.
3. Monitor IRS Activity
Ask the PEO to notify you of any IRS inquiries. You may also request a transcript from the IRS to verify whether a claim was filed and its status.
4. Consult a Tax Litigation Attorney
An attorney experienced in ERC refund litigation and third-party payer disputes can assess your case and help recover your refund through the courts.
Filing a Lawsuit: What to Expect
To sue for your ERC refund, your attorney will file a complaint establishing:
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Your eligibility for the credit
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The amount claimed and how it was calculated
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IRS inaction or denial
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Your right to recover under federal law
This process may lead to a negotiated settlement with the Department of Justice or a court-issued refund order. Either outcome is legally binding and shields your business from future IRS clawbacks.
Why Now Is the Time to Act
With Congress expanding enforcement powers and the IRS targeting high-risk filings, businesses that used PEOs must act swiftly. Don’t assume that because your refund was issued — or hasn’t been clawed back yet — that you’re in the clear.
Litigation creates legal finality, protects your funds, and helps you recover what you’re owed.
Conclusion: ERC Litigation Is Essential for PEO-Related Claims
ERC claims processed through PEOs carry a unique set of legal and financial risks. If you’ve experienced delays, clawbacks, or disputes over refund amounts, you don’t have to accept it. ERC litigation offers a path to recovery, resolution, and peace of mind.
Need Legal Help With Your ERC Claim?
If your ERC refund was filed through a PEO and you’re facing issues, contact Brotman Law today. Our attorneys are fluent in ERC litigation and will help you protect your business and pursue the compensation you deserve.
This article is for informational purposes only and does not constitute legal advice. For tailored guidance, consult with an attorney.
Learn More About the Litigation Process
Want to understand the steps involved in suing the IRS for your ERC refund? Read our in-depth guide on The ERC Litigation Process: What to Expect When Suing the IRS to get a clearer picture of how legal action can help you secure your refund faster.
Contact us today to schedule a consultation and take the first step toward recovering your ERC refund.