ERC litigation is the process of filing a lawsuit against the IRS to compel payment of a denied or delayed Employee Retention Credit claim. When the IRS fails to process a valid ERC refund claim within a reasonable timeframe, or issues a wrongful disallowance, businesses can sue in U.S. Tax Court, the Court of Federal Claims, or federal district court.

The reality facing businesses in 2026 is stark. The IRS has a backlog of hundreds of thousands of unprocessed ERC claims. Many businesses filed legitimate claims 18, 24, even 30 months ago and have received nothing — no refund, no denial, no communication at all. The September 2023 moratorium on processing new ERC claims compounded the problem, and the IRS’s subsequent posture of aggressive disallowance has caught thousands of legitimate businesses in the crossfire of a fraud crackdown.

Administrative remedies — protests, appeals, phone calls to the IRS — are failing. Protests sit in queues for years. IRS Appeals is overwhelmed. And the IRS has shown no urgency to resolve the backlog through normal administrative channels.

That leaves litigation. Filing a lawsuit against the IRS is not a dramatic step — it is, for many businesses, the only remaining path to recover money they are legally owed. A lawsuit forces the IRS to assign your case to the Department of Justice Tax Division, which creates accountability, deadlines, and a forum where the IRS must actually respond to your claim. In our experience, the majority of ERC cases settle once the government is forced to engage with the merits of the claim.

Call (619) 378-3138 to speak with an ERC litigation attorney today.

Why ERC Litigation Is Now Necessary

The ERC program was designed to help businesses retain employees during the COVID-19 pandemic. Congress authorized billions in refundable tax credits, and hundreds of thousands of businesses filed claims in good faith. The IRS’s inability to process those claims — and its increasingly aggressive disallowance posture — has created a situation where litigation is no longer an option of last resort. It is the primary mechanism for forcing the IRS to act.

Several factors have converged to make ERC litigation necessary:

• Massive processing backlog. The IRS has acknowledged that hundreds of thousands of ERC claims remain unprocessed. Businesses that filed amended returns in 2021 and 2022 are still waiting for refunds they were promised under federal law.
• The September 2023 moratorium. The IRS imposed a moratorium on processing new ERC claims filed after September 14, 2023. While the IRS has slowly resumed some processing, the moratorium created a dam of unresolved claims that continues to grow, and the IRS has not provided a clear timeline for full resolution.
• Aggressive disallowance posture. The IRS established a dedicated ERC examination unit that has been disallowing claims at a high rate. Many of these disallowances are based on cursory review, form-letter reasoning, and a one-size-fits-all approach that fails to account for the specific facts of individual businesses.
• Legitimate businesses caught in the fraud crackdown. The IRS has correctly identified that some ERC claims were fraudulent — filed by promoters and mills with no legitimate basis. But the agency’s broad-brush approach has swept up thousands of businesses with genuine eligibility, proper documentation, and legitimate claims that deserve to be paid.
• Administrative remedies are failing. Filing a protest after a disallowance sends your case to IRS Appeals, where it joins a queue that stretches years into the future. The IRS has not allocated sufficient resources to Appeals to handle the volume of ERC disputes, making the administrative process a dead end for businesses that need resolution now.
• Litigation forces prioritization. When you file a lawsuit, your case transfers from the IRS examination division to the Department of Justice Tax Division. DOJ attorneys have court-imposed deadlines they must meet. The government must file an answer, engage in discovery, and either settle or go to trial. This creates accountability that the administrative process simply does not provide.

Legal Pathways for ERC Refund Claims

There are multiple legal pathways for pursuing an ERC refund through litigation. The right choice depends on where your claim stands procedurally — whether the IRS has formally denied it, partially disallowed it, or simply failed to act on it at all.

Refund Suit in Federal District Court or Court of Federal Claims

Under IRC Section 7422, a taxpayer who has filed a claim for refund can sue the government to recover the amount owed. For ERC claims, this is one of the most common litigation pathways.

The requirements are straightforward:

1. File a formal refund claim. For ERC, this is typically the amended Form 941-X that was already filed. In some cases, a separate Form 843 (Claim for Refund and Request for Abatement) may be necessary to formally put the IRS on notice that you are requesting a refund.
2. Wait six months or receive a formal denial. Under 26 USC 6532, you must wait at least six months after filing your refund claim before filing suit — unless the IRS formally denies your claim sooner. If you receive Letter 105-C (formal claim disallowance), the six-month waiting period is no longer required.
3. File suit within two years of denial. If the IRS formally denies your claim, you have two years from the date of the denial letter to file suit. This is a hard deadline — miss it and you lose your right to sue. If the IRS has not denied your claim (simply not acted on it), the two-year clock has not started running.
4. Full payment is NOT required. Unlike many tax refund suits where the taxpayer must pay the full assessed amount before suing (the Flora full-payment rule), ERC refund claims are different. Because the ERC is a refundable credit — not an additional tax assessment — the full-payment rule generally does not apply. You do not need to write the IRS a check before filing suit.

Jurisdiction: You can file a refund suit in the U.S. District Court where your business is located, or in the U.S. Court of Federal Claims in Washington, D.C. District court provides a jury trial option and local venue. The Court of Federal Claims has judges with specialized tax expertise but sits only in D.C.

Tax Court Petition

Under IRC Section 6213, a taxpayer can petition the U.S. Tax Court when the IRS issues a statutory notice of deficiency or a formal notice of claim disallowance. For ERC cases, a Tax Court petition is available when the IRS issues Letter 105-C formally disallowing your credit.

Key features of the Tax Court pathway:

• 90-day filing deadline. You must file your Tax Court petition within 90 days of the date on the notice of disallowance. This deadline is jurisdictional — the Tax Court cannot hear your case if you file even one day late.
• No prepayment required. The Tax Court is a prepayment forum. You do not need to pay the disputed amount before filing your petition. This is one of the primary advantages of Tax Court for ERC disputes.
• Specialized expertise. Tax Court judges handle nothing but tax cases. They understand the Internal Revenue Code, Treasury Regulations, and IRS procedures at a level of depth that generalist federal judges may not.
• Settlement culture. The Tax Court has a well-established settlement process. IRS Chief Counsel attorneys assigned to Tax Court cases frequently negotiate settlements before trial, particularly when the taxpayer presents strong documentation and legal arguments.

Mandamus and Administrative Procedure Act Actions

When the IRS has simply failed to act on your ERC claim — no denial, no disallowance, just silence — traditional refund suits and Tax Court petitions may not be available. In these situations, two additional legal tools can force the IRS to act.

Administrative Procedure Act (5 USC 706): The APA allows a party to sue a federal agency when the agency has “unreasonably delayed” required action. If you filed your ERC refund claim 12, 18, or 24 months ago and the IRS has taken no action whatsoever, an APA suit argues that the IRS has a non-discretionary duty to process refund claims and has unreasonably delayed performing that duty. Courts evaluate unreasonable delay using the TRAC factors — including the length of the delay, the complexity of the action, and whether the agency has offered any explanation for the delay.

Writ of Mandamus (28 USC 1361): A mandamus action asks the court to order the IRS to perform a specific, non-discretionary act — in this case, processing your ERC claim. Mandamus is a narrow remedy, but courts have recognized that the IRS has a non-discretionary duty to process properly filed tax returns and refund claims. When the IRS has simply sat on a claim for an unreasonable period, mandamus can compel action.

Recent case law has been increasingly favorable to taxpayers bringing APA and mandamus claims for ERC delays. Federal courts have recognized that the IRS’s blanket moratorium and processing backlog do not excuse the agency from its legal obligation to act on individual refund claims within a reasonable timeframe.

The ERC Litigation Process

ERC litigation follows a structured process. While every case has unique facts, the general progression from evaluation to resolution follows these steps:

Timeline: From filing to resolution, ERC litigation typically takes 8 to 18 months. Cases that settle early in the process can resolve in as few as 4-6 months after filing. Cases that proceed through full discovery and trial preparation take longer. Mandamus and APA actions, which focus on IRS delay rather than the merits of the claim, often resolve faster because the IRS frequently processes the claim once the lawsuit is filed.

ERC Disallowance Defense

If you received Letter 105-C from the IRS disallowing your ERC claim, the first step is understanding exactly what the IRS got wrong — and they frequently get it wrong.

Letter 105-C is the IRS’s formal claim disallowance. It states the amount being disallowed and provides a brief explanation of the reason. In many ERC cases, the explanation is generic, formulaic, and fails to address the specific facts of the business. That creates an opportunity, because the IRS bears the burden of supporting its disallowance in litigation.

Here are the most common disallowance grounds and how we challenge them:

“Not a Qualifying Government Order”

The IRS frequently disallows ERC claims on the basis that the business was not subject to a qualifying government order that caused a full or partial suspension of operations. This is often the IRS’s weakest argument. The ERC statute does not require a complete shutdown — a partial suspension is sufficient. If a government order limited your capacity, restricted operations, forced you to modify business practices, or prevented you from serving customers in the normal manner, you may qualify. We document the specific government orders (federal, state, county, and municipal), map them to the specific business operations they affected, and demonstrate how the orders caused more than a nominal impact on the business’s ability to operate.

“Gross Receipts Test Not Met”

The IRS sometimes disallows claims by asserting that the business did not experience the required decline in gross receipts (50% decline for 2020, 20% decline for 2021). In many cases, the IRS applies the wrong comparison quarters, uses incorrect revenue figures, or fails to account for the proper methodology prescribed by IRS Notice 2021-20 and Notice 2021-49. We recalculate gross receipts using the correct quarters and methodology, and present the analysis in a format that withstands government scrutiny.

“Wages Already Claimed Under PPP”

The interaction between PPP loan forgiveness and the ERC is one of the most misunderstood areas of the credit. The IRS disallows claims when it believes the same wages were used for both PPP forgiveness and the ERC. However, proper allocation between the two programs is permissible — the key is demonstrating that the wages claimed for ERC were not the same wages used to support PPP forgiveness. We prepare detailed wage allocation analyses that demonstrate compliance with the anti-double-dipping rules.

“Large Employer vs. Small Employer Misclassification”

The ERC rules differ significantly based on whether a business is a “large employer” (more than 500 full-time employees in 2019 for 2021 credits, more than 100 for 2020 credits) or a “small employer.” Large employers can only claim the credit on wages paid to employees who were not providing services. Small employers can claim the credit on all employee wages. The IRS sometimes misclassifies businesses or applies the wrong employee count, leading to erroneous disallowances.

“Recovery Startup Business Requirements Not Met”

Businesses that started after February 15, 2020 may qualify as “recovery startup businesses” with up to $50,000 in ERC per quarter in Q3 and Q4 of 2021. The IRS disallows these claims when it disputes the business’s start date or annual gross receipts. We gather corporate formation documents, initial revenue records, and operational evidence to establish qualification under this provision.

The Protest and Appeals Process Before Litigation

After receiving Letter 105-C, you have the option to file a protest with IRS Appeals before going to court. The protest is a written statement explaining why the disallowance is wrong, supported by documentation. IRS Appeals is supposed to provide an independent review, and Appeals officers do have settlement authority. However, the Appeals process for ERC cases currently takes 12-24 months or longer due to volume. In some cases, it makes strategic sense to bypass Appeals and go directly to court — particularly when the statute of limitations is a concern, when the dollar amount justifies the litigation expense, or when the facts strongly favor the taxpayer.

Who Qualifies for ERC Litigation

ERC litigation is appropriate for businesses in several specific situations:

• Businesses that filed legitimate ERC claims and received no response for six or more months. If you filed Form 941-X claiming the Employee Retention Credit and the IRS has neither paid your claim nor denied it within six months, you have a legal basis to file suit. The longer the delay, the stronger your case for unreasonable delay under the APA and mandamus.
• Businesses whose claims were formally disallowed (Letter 105-C). If the IRS issued a formal disallowance and you believe the disallowance was wrong, you can petition the Tax Court within 90 days or file a refund suit in federal court within two years.
• Businesses that received partial disallowances. The IRS sometimes allows part of an ERC claim and disallows the rest. If you believe the disallowed portion was legitimate, you can litigate the difference while accepting the portion that was allowed.
• Businesses pressured to withdraw through the IRS Voluntary Disclosure Program. The IRS created a withdrawal program encouraging businesses to voluntarily give up their ERC claims. If you were pressured to withdraw a claim you believe is valid — or if you declined to withdraw and are now facing examination — litigation may be the appropriate next step.
• Businesses with claims affected by the moratorium. If you filed a claim that was caught in the September 2023 moratorium and has not been processed, a mandamus or APA action can compel the IRS to process your specific claim.

ERC litigation is NOT appropriate for: Claims that were fraudulent, claims filed by promoters or mills without proper documentation or legitimate eligibility analysis, or claims where the business clearly does not meet the statutory requirements. We evaluate every case before accepting it and decline cases where the underlying claim lacks merit.

ERC Litigation vs. ERC Audit Defense — What’s the Difference?

These are two distinct services that address different stages of an ERC dispute. Understanding the difference is important because the legal strategy, timeline, and forum are entirely different.

Some cases involve both stages: the IRS examines your claim, disallows it, and then you litigate the disallowance. If you are currently under ERC audit, it is critical to build the strongest possible administrative record because that record becomes the foundation for any subsequent litigation.

If you need help with an active ERC examination, visit our ERC audit defense page. If the IRS has already denied your claim or failed to process it, you are in litigation territory — and that is what this page addresses.

Brotman Law ERC Litigation Results

Our firm has filed ERC lawsuits across multiple federal courts and the U.S. Tax Court. Here are representative outcomes:

Every case is different, and past results do not guarantee a specific outcome. But these cases illustrate a consistent pattern: when the IRS is forced to engage with the merits of a legitimate ERC claim, the results favor the taxpayer.

The Cost of Waiting

Every month you wait to take action on your ERC claim, you lose money and increase your risk.

Interest the IRS owes you. Under IRC Section 6611, the IRS is required to pay interest on refunds that are not paid within 45 days of the filing of a return or claim. For ERC claims that have been pending for 12, 18, or 24 months, the accrued interest is substantial — current IRS interest rates are at historically high levels. That interest compounds quarterly. Every month the IRS delays your refund, they owe you more interest. But you only collect that interest if you actually recover the refund.

Opportunity cost of capital. The ERC refund is money your business earned and is legally entitled to receive. While that capital sits in IRS limbo, your business cannot invest it, use it for growth, hire employees, or deploy it in any productive way. For a business waiting on a $500,000 or $1 million refund, the opportunity cost over 18 months is significant.

Statute of limitations risk. The two-year statute of limitations to file a refund suit begins running when the IRS formally denies your claim (Letter 105-C). If you received a disallowance and have been sitting on it, the clock is ticking. Once the two-year window closes, your right to sue is gone — permanently. Similarly, the 90-day deadline to petition the Tax Court is absolute and cannot be extended.

IRS Voluntary Disclosure Program penalties. The IRS has been encouraging businesses to voluntarily withdraw ERC claims or participate in its voluntary disclosure program, which requires repayment of the credit plus penalties. If you have a legitimate claim, voluntarily surrendering it — and paying penalties — when you could instead litigate and recover the full amount plus interest is a costly mistake.

Why acting now is critical. The federal courts are seeing an increasing volume of ERC cases. The earlier you file, the sooner you get on a court’s docket, the sooner DOJ assigns an attorney, and the sooner you reach resolution. Waiting only means a longer queue and more time without your money.

For a comprehensive overview of the Employee Retention Credit program, eligibility requirements, and how the credit works, see our Ultimate Guide to the Employee Retention Credit.