Why ERC Claims Filed Through PEOs Create Legal Problems
Professional Employer Organizations (PEOs) provide outsourced HR, payroll, and tax compliance services for businesses. While many companies used PEOs to streamline operations during the pandemic, these relationships have created major legal pitfalls in Employee Retention Credit (ERC) claims.
When a PEO files an ERC claim under its own EIN and allocates the refund via Schedule R, it often leads to:
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IRS communication gaps
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Misfiled or unfiled claims
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Missing refunds
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Unclear legal standing for the business client
This article explores the legal risks, potential claims, and strategies for litigation when ERC refunds are disputed or mishandled by PEOs.
IRS Communication Gaps: You’re in the Dark
Because PEOs file payroll returns using their own EIN, the IRS does not communicate directly with the client business. If your ERC claim was filed through a PEO:
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You may not receive audit notices or IRS correspondence
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You may not know if your claim was ever filed or denied
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You rely on the PEO to update you — and that doesn’t always happen
Who Has Legal Standing to Litigate or Appeal?
Can you sue or appeal if your ERC was filed under a PEO’s EIN?
The answer is often yes, but it depends on proving:
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Your business bore the qualified wages
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You were allocated the credit via Schedule R
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You suffered a direct financial injury
With proper documentation, courts may recognize your standing — but clear legal arguments are essential.
Contract Breaches and Fiduciary Failures by PEOs
If your PEO:
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Filed without authorization
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Failed to file at all
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Mishandled funds
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Gave incorrect tax advice
— then they may be liable for:
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Breach of Contract
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Breach of Fiduciary Duty
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Negligence
Fraud and Conversion: When Misconduct Becomes Criminal
Some businesses have discovered that PEOs:
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Filed ERC claims without permission
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Falsely inflated wages to boost the credit
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Retained IRS refunds instead of forwarding them to clients
These issues may support legal claims for:
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Fraudulent misrepresentation
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Conversion
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Constructive fraud
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Unjust enrichment
Indemnity Clauses and Liability Limitations in PEO Contracts
Many PEO contracts contain indemnity clauses like:
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“We are not liable for IRS penalties.”
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“Client indemnifies PEO for all tax-related filings.”
But courts may find these clauses unenforceable if:
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The PEO acted fraudulently or grossly negligently
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The clause violates public policy
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State laws limit disclaimers of liability
A close legal review can expose opportunities to challenge these limitations.
Venue and Jurisdiction Complexities
ERC refund disputes can require litigation in multiple courts:
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Federal court for IRS refund claims
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State court for contract disputes with PEOs
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Arbitration if the PEO contract mandates it
Choosing the right venue and coordinating claims is crucial to protect your rights.
Protective Actions to Take Now
1. Request Documentation
Ask your PEO for copies of the 941-X, Schedule R, payroll summaries, and all IRS correspondence.
2. Review Your PEO Contract
Identify who is responsible for filings, disbursement, and IRS communication.
3. Verify the Refund
Use IRS transcript services to confirm if and when a refund was issued.
4. Consult Legal Counsel
A tax litigation attorney can evaluate both IRS claims and PEO liability.
Conclusion: Legal Guidance Is Essential in PEO ERC Disputes
If your PEO mishandled your ERC claim, your business could face clawbacks, denied refunds, or missing funds — through no fault of your own. You have legal rights and options.
Whether pursuing a refund lawsuit against the IRS or holding your PEO accountable for breach or fraud, taking action now can protect your business and secure the refund you earned.
Need Help With a PEO-Related ERC Dispute?
At Brotman Law, we have experience resolving ERC disputes involving PEOs. If you’re dealing with a delayed refund, clawback risk, or PEO misconduct, contact us today to schedule a confidential consultation.
This article is for general informational purposes only and does not constitute legal advice. For legal guidance tailored to your situation, consult a qualified 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.