Employee Retention Tax Credit Litigation

Why ERC Eligibility Matters More Than Ever in 2025

The Employee Retention Credit (ERC) was designed to reward businesses that retained employees during the COVID-19 pandemic. But in 2025, with the IRS cracking down on claims, it’s more important than ever to understand whether your business truly qualifies—and whether litigation is the right step to secure your refund.

This article introduces a practical four-tier framework to help businesses evaluate the strength of their ERC claim. Whether you’re awaiting a delayed refund or preparing for litigation, this guide will help you make an informed decision.

How Businesses Qualify for the ERC

There are three main ways to qualify for the Employee Retention Credit:

1. Revenue Decline Test: A significant drop in gross receipts—50% in 2020 or 20% in 2021—compared to the same quarter in 2019.

2. Full or Partial Suspension Due to Government Orders: The business was affected by a government-mandated closure or restriction that impacted operations.

3. Recovery Startup Business: The business began operations after February 15, 2020, and had less than $1M in annual gross receipts.

The key isn’t just meeting these tests—but having the documentation and legal foundation to prove it.

Tier 1: Strong, Fully Substantiated ERC Claims

• Documented revenue drop that meets IRS thresholds

• Payroll records aligned with Form 941-X filings

• Clear government orders with direct operational impact

• Internal memos or legal analysis supporting eligibility

• No involvement of ERC promoters or third-party schemes

Tier 1 claims are ideal for ERC refund litigation. If you haven’t been paid or were wrongly denied, a lawsuit can lead to a binding resolution and protect your refund from future IRS clawbacks.

Tier 2: Legitimate Claims With Some Complexity

Businesses in this tier meet the core eligibility criteria but may face added scrutiny. Common scenarios include:

• Used a Professional Employer Organization (PEO) or third-party filer

• Partial suspension involved indirect effects or multi-state rules

• Revenue dipped just below thresholds but not in all quarters

• Supporting documents exist but may require additional explanation

Tier 2 claims are often successful in court with the right legal framing. A careful review can uncover supporting facts and strengthen the litigation posture.

Tier 3: Risky or Ambiguous ERC Claims

• Relied on supply chain disruption without proving direct impact

• Used vague or unverified government orders

• Minimal financial drop, close to eligibility thresholds

• Filed through an ERC promoter with limited documentation

• No written analysis or internal records supporting the claim

Businesses in Tier 3 should tread carefully. While some claims may be legitimate, others could trigger IRS audits, clawbacks, or denials. Litigation is possible but should only be pursued after a deep factual and legal review.

Tier 4: Weak or High-Risk ERC Claims (Avoid Litigation)

• No measurable drop in revenue and no valid suspension

• Relied on generic “COVID impact” without linking to business operations

• No records to support claim amount or eligibility

• Claim filed by an ERC mill or promoter with questionable tactics

• Business cannot explain how eligibility was determined

Tier 4 claims should not be litigated. Instead, businesses in this tier should consider legal alternatives such as the IRS’s Voluntary Disclosure Program to reduce potential liability.

Self-Evaluation: What Tier Is Your ERC Claim?

Ask yourself:

• Can you produce your 941-X and ERC calculation files?

• Do you have documentation showing how your operations were impacted?

• Did you claim based on clear, traceable government orders or revenue losses?

• Was your claim prepared by a trusted CPA or law firm?

If the answer to most of these is “yes,” you’re likely in Tier 1 or Tier 2—and potentially a strong candidate for litigation.

Why This Matters: The IRS Is Tightening ERC Enforcement

The IRS has paused ERC processing, ramped up audits, and may disallow claims filed after January 31, 2024. Many legitimate businesses are seeing their refunds delayed, reduced, or denied without cause.

Litigation offers a way to break the logjam, force IRS response, and secure a final judgment that protects your refund. But it only works when your claim is grounded in strong facts and law.

Conclusion: Know Before You Sue

The ERC program was generous—but it wasn’t simple. Before pursuing litigation, you must know exactly where your claim stands.

• Tier 1 and 2? Consider litigation if your refund is delayed or denied.

• Tier 3? Proceed with caution—get a legal review first.

• Tier 4? Avoid litigation and consider corrective action.

Litigation is not about being aggressive—it’s about being confident. If your claim holds up under scrutiny, a court may be the fastest, fairest way to get the refund your business earned.

This article is for educational purposes only and does not constitute legal advice. Businesses should consult a qualified tax attorney for guidance on their specific situation.

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.

If the IRS has disallowed your ERC claim, you may have options — including litigation. Learn about ERC disallowance defense →

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:

• Delayed or Denied Refunds: You may not even know the status of your claim because the IRS contacts your PEO, not you.

• IRS Clawbacks: If your PEO misfiled, misrepresented eligibility, or improperly allocated funds, the IRS may demand the refund back — with penalties and interest.

• 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

• Schedule R Errors: Incomplete or inaccurate credit allocation among clients

• Lack of Substantiation: Missing documentation that PEOs failed to collect or submit

• Unauthorized Filing: Some PEOs submitted ERC claims without the client’s knowledge or consent

• 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:

• Your eligibility for the credit

• The amount claimed and how it was calculated

• IRS inaction or denial

• 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.

What’s Happening With the Employee Retention Credit in 2025?

The Employee Retention Credit (ERC) was a financial safety net during the COVID-19 crisis. Now, in 2025, a sweeping new tax proposal — dubbed the “One Big Beautiful Bill” — threatens the security of that credit.

Under proposed legislation, the IRS could retroactively invalidate ERC claims, expand audits, and aggressively pursue clawbacks. If you’ve filed or received an ERC refund, here’s why now is the time to act — and how litigation can protect your business.

Key Provisions in the New ERC Enforcement Legislation

• Retroactive Deadline: ERC claims filed after January 31, 2024, may be retroactively disallowed — even if paid.

• Extended Audit Period: The IRS would have six years to audit ERC claims.

• Enforcement Penalties: Targets ERC promoters, but businesses may face indirect fallout.

This means the IRS could demand repayment of refunds — potentially with interest and penalties.

What Is an IRS ERC Clawback — and Could It Affect Me?

An ERC clawback happens when the IRS determines a refund was improperly issued and demands repayment. This can include:

• Repayment of the ERC amount

• Accrued interest and penalties

• IRS audits of your business finances

Even businesses that followed the rules may be at risk under the new law.

Why Filing a Lawsuit Stops the IRS From Clawing Back Your Refund

The most powerful defense against a clawback is filing a refund lawsuit. Here’s why litigation offers real protection:

Court Judgments Are Final

When a court grants your ERC refund, that ruling is binding. The IRS can’t revisit it.

Settlements Are Enforceable

Even a pre-trial settlement with the Department of Justice (DOJ) includes a legal release of claims, blocking future IRS action.

Litigation Ends Limbo

Many claims are in review or delayed. Litigation forces a resolution and prevents further delay.

How ERC Refund Litigation Works

To sue for your ERC refund, one of two conditions must be met:

• Six months have passed since filing Form 941-X

• The IRS has formally denied your claim

Steps in the ERC Lawsuit Process

1. Confirm eligibility: Check filing date or denial status.

2. Gather evidence: Payroll records, PPP info, financial statements, and eligibility documentation.

3. File complaint: Submit in U.S. District Court or U.S. Court of Federal Claims.

4. Negotiate or proceed to trial: DOJ evaluates claim and often settles.

5. Get final resolution: Judgment or settlement secures your refund.

Why Now Is the Time to File

If you’ve received your ERC refund, don’t assume you’re safe. With the IRS empowered to reopen and claw back claims for six years, litigation may be your only guaranteed protection.

Litigation benefits:

• Protects your refund from future clawback

• Accelerates resolution of pending claims

• Locks in legal standing before new laws take effect

What If I Used a Third-Party Preparer?

Even if a consultant or promoter filed your ERC, you still have the right to litigate. The focus is on your eligibility — not who prepared the return.

Does Litigation Speed Up My ERC Refund?

Yes, in many cases. Filing suit compels DOJ to review and may lead to faster settlement or payment — especially for claims caught in long-term review.

Conclusion: Litigation Is the Strongest Defense Against IRS ERC Clawbacks

The IRS is increasing its scrutiny of ERC refunds, and Congress is helping expand their power. If your refund was properly claimed, you shouldn’t lose it because of political shifts or retroactive enforcement.

ERC refund litigation gives you peace of mind, legal clarity, and financial protection.

Need Help Protecting Your ERC Refund?

Contact Brotman Law today to speak with an experienced ERC litigation attorney. We’ll evaluate your case, prepare your file, and fight for your refund in court — before it’s too late.

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.

If the IRS has disallowed your ERC claim, you may have options — including litigation. Learn about ERC disallowance defense →

Understanding Employee Retention Tax Credit Refund Delays

The Employee Retention Tax Credit (ERTC) was designed to provide financial relief to businesses impacted by the COVID-19 pandemic. However, many businesses have been left waiting months—or even years—for their erc refunds. The IRS is overwhelmed, and the backlog of unprocessed claims continues to grow. If you’re wondering how to expedite your refund, this guide will walk you through your options. If you’re interested in taking the next step, you can learn more about the ERC refund litigation process here. 

Why Is Your ERC Refund Delayed?

1. The IRS Has No Obligation to Process Your Claim Quickly

Unlike tax returns, which have defined processing deadlines, the IRS has no legal requirement to process ERC claims within a certain timeframe. According to 26 U.S.C. § 6532(a)(1), the IRS is not obligated to act on your refund request promptly. This means they can ignore your claim indefinitely without penalty. Learn what happens when you sue the IRS to expedite your ERC refund.

2. IRS Staffing and Resource Issues

Under the Trump Administration, the Department of Treasury underwent significant downsizing, leaving the IRS with even fewer resources to handle ERC processing. Additionally, the IRS is currently without a permanent Commissioner to oversee the agency, further contributing to administrative inefficiencies. With limited staffing and no clear leadership, the backlog of ERC claims continues to pile up, leading to extensive delays for businesses awaiting their refunds.

3. The IRS’s Strategy: Delay and Deny

The IRS assumes that a large percentage of ERC claims are fraudulent. As a result, even legitimate claims face excessive scrutiny and processing delays. The agency’s best strategy is to delay claims as long as possible, effectively “waiting out” businesses in hopes that they will give up or fail to take legal action.

How to Expedite Your ERC Refund

File a Lawsuit Against the IRS

As such, Brotman Law has begun to recommend that its clients consider judicial action against the IRS in federal court to demand payment of their Employee Retention Tax Credit. Our firm anticipates initiating hundreds of suits in federal court on behalf of our clients. Our ERC Litigation Service can help you take the first step toward recovering your refund.

What Does Judicial Action Against the IRS Mean?

Suing the IRS, either in your local district court or in the Federal Court of Claims (a specialized court dedicated to claims against the government), may sound intimidating. Many people worry that taking legal action against the government could lead to scrutiny or retaliation, but this is not the case.

When you sue the IRS, you are essentially removing your ERC claim from the hands of the IRS and placing it before a neutral federal judge. The IRS itself does not handle these cases in court—claims against the IRS are managed by the Department of Justice’s Civil Tax Division, which is also a neutral party.

The primary benefit of ERC refund litigation is that it ensures your case will be reviewed and resolved within a set timeframe. Rather than waiting indefinitely for the IRS to issue you your ERC refund, judicial action forces a resolution, guaranteeing that your claim will be addressed and your ERC refund processed sooner than if you remain stuck in administrative limbo.

Why ERC Refund Litigation Is the Best Option

• Forces the IRS to respond – Once an ERC lawsuit is filed, the IRS cannot continue to ignore your claim. The legal process compels them to take action, ensuring that your case moves forward rather than remaining stagnant in administrative delays.
• No risk of retaliation – Many business owners worry about retaliation from the IRS if they take legal action. However, lawsuits are handled by the Department of Justice’s Civil Tax Division, not the IRS itself. This means that your case is reviewed by an independent legal body, eliminating any fear of unfair treatment. Want to know more about what happens when you sue the IRS? Check out our article that breaks down the process and what you can expect.
• Potential for settlement – A significant number of cases settle before reaching trial. The IRS, facing the prospect of litigation, often chooses to resolve disputes quickly rather than engage in prolonged court battles. This increases the likelihood that your ERC refund will be expedited through a settlement agreement.
• Courts are ruling against the IRS – Recent court decisions have favored businesses in ERC refund disputes, setting a strong precedent for successful outcomes. The judicial system is proving to be an effective recourse for businesses facing long delays, making litigation a strategic move for expediting your ERC refund.

Take Action Now

If your ERC refund is delayed, waiting isn’t a strategy. The IRS has no legal deadline to process your ERC claim, and their lack of resources only exacerbates the issue. ERC refund litigation may be the most effective way to get the refund your business is entitled to. Contact a qualified tax attorney today to discuss your options and take the necessary steps to expedite your ERC refund.

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.

The Employee Retention Tax Credit (ERC) was designed to provide financial relief to businesses impacted by the COVID-19 pandemic, but many companies are still waiting for their erc refunds due to IRS processing delays. With no legal deadlines forcing the IRS to act, businesses are left in limbo, facing financial strain and uncertainty. As a result, many have turned to filing ERC refund lawsuits to force the IRS to pay out the refunds they are owed. In this article, we’ll break down why businesses are taking legal action by initiating ERC refund lawsuits, who is eligible to file a lawsuit, the legal process involved, and what companies can expect when taking legal action.

Why Businesses Are Suing the IRS: The Rise of ERC Refund Lawsuits

The Lack of Legal Deadlines for IRS Processing

Unlike personal tax refunds, the IRS has no set deadline for processing ERC refunds. This lack of accountability has led to significant delays, leaving businesses without critical financial relief and no clear timeframe for when to expect their refunds.

Unjustified Employee Retention Tax Credit Denials

The IRS has already processed the smaller, lower-risk ERC claims—about 10% of total filings. What’s left are the larger claims, like yours, which are either being delayed or outright denied. At our firm, we’ve received over 60 denial letters for claims that, based on our objective standards, should qualify for the ERC. The IRS has provided no clear rationale or explanation for why these claims are being denied.

Essentially, what the IRS is doing is delaying and denying claims without any real justification, much like an insurance company that drags its feet before denying a claim.

ERC Backlogs and Processing Delays

The IRS has been overwhelmed by the volume of ERC claims, leading to long wait times—most times exceeding a year. During the Trump Administration, the Department of Treasury implemented significant budget cuts, which directly impacted the IRS’s ability to efficiently manage the large number of ERC claims. With fewer staff members available to process the claims and a lack of consistent leadership, the agency has struggled to keep up, contributing to an ongoing backlog and long delays for businesses waiting on their refunds.

Who Can File an ERC Refund Lawsuit?

To file an ERC refund lawsuit, a business must have:

• Properly filed an ERC claim via Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return).
• Waited at least six months without receiving a refund or formal denial.

When a Business Should Consider an ERC Refund Lawsuit

At Brotman Law, we recommend companies that fit the following criteria, file a lawsuit:

• Your Employee Retention Tax Credit claim is $250,000 or more, ideally $500,000 or more. Your claim has to be large enough for the government to fear that you will go the distance with litigation.
• Your business is dependent on a physical location and/or is human capital dependent for the production of goods or services.
• Your business was impacted by government orders related to COVID-19. Although the IRS safe harbor is not an absolute, businesses with more than a 10% drop in revenue or their ability to produce goods or services was hindered are better candidates.
• You would be able to document this impact through emails, financial and/or operational information showing an adverse impact on revenue or a reduction in capacity, or through us documenting this impact through employee witness statements. The more concretely you can show impact, the better (although we can help with this).

The Legal Process of Filing an ERC Refund Lawsuit

What Judicial Action Involves:

1. File a Timely Refund Claim: Ensure that your Forms 941-X were filed within the applicable statute of limitations. This is typically three years from the date the original Form 941 was filed or two years from the date the tax was paid, whichever is later (26 U.S.C. § 6511) [1].
2. Wait for IRS Response: The IRS has no statutory obligation to process your ERC refund claim within a specific timeframe. If the IRS fails to respond to your claim within six months, you can proceed to the next step (26 U.S.C. § 6532(a)(1)) [2].
3. Initiate an ERC Refund Lawsuit: If the IRS denies your claim or fails to respond within six months, you can file a lawsuit in the relevant federal district court or the Court of Federal Claims (28 U.S.C. § 1346(a)(1); 26 U.S.C. § 7422) [3].
4. Discovery/Exchange Documentation: Once the lawsuit is filed, attorneys for both the business and the government will exchange documentation and discuss the merits of the ERC claim. This process can lead to a full allowance of the claim or a compromise (26 U.S.C. § 7422(a)) [3].
5. Negotiate Settlement/Alternative Dispute Resolution: Because of the high volume of cases in federal court, judges will often encourage or strongly encourage the parties to reach a resolution prior to going far in the federal court process. Recently, the government has adopted a willingness to engage in settlement discussions or to pursue mediation or arbitration vs. taking the case to trial, which consumes a lot of time and energy on both sides.
6. Motion for Summary Judgement: If dispute resolution does not work, usually one of the parties will file a motion for summary judgment, which is a motion for the court to decide the case based on the parties’ written submissions.
7. Trial: If all else fails, the case will be set for trial and the Plaintiff will have their day in court.
8. Decision: The judge in the case, or jury if the plaintiff opts for a jury trial, will ultimately decide the case.

Potential Outcomes of ERC Lawsuits

Early results in federal court for ERC refund lawsuits have shown a clear trend: the IRS is increasingly willing to settle Employee Retention Credit (ERC) cases rather than litigate them. This is primarily because the IRS recognizes that a negative decision in federal court could set a damaging precedent for all ERC claims nationwide. Such a ruling would likely lead to a flood of litigation against the IRS for its failure to process these claims in a timely manner. The IRS is far more concerned about the overall ramifications of mass litigation than the individual results of each case.

We believe that many businesses were significantly impacted by government orders during the COVID-19 pandemic—more so than just nominally. If COVID restrictions had an effect on your business, it’s highly likely that you qualify for some level of relief. Federal judges, who are impartial in these matters, may likely side with businesses, as the evidence of impact is clear and the legal framework for relief is well-established.

Another important aspect is that businesses have the option to have their case decided by a jury in federal district court. This could allow for a broader perspective on the case and offer a greater opportunity to explain the specific hardships faced due to COVID-related restrictions.

Given these factors, we believe the Department of Justice (DOJ) Tax Division will be pressured to settle these cases more quickly than they typically would. With mounting cases and the potential for widespread legal repercussions, the IRS may choose to settle rather than risk a large-scale legal loss. In the right circumstances, businesses can be on the offensive, pushing their claims forward with confidence, knowing the momentum is in their favor.

Myths and Misconceptions About ERC Refund Lawsuits

Addressing Fears of Retaliation

One of the most common misconceptions about suing the IRS is the fear that it will lead to increased scrutiny or retaliation, such as being added to a federal watchlist. However, this is simply not true. Suing the IRS, whether in your local district court or in the Federal Court of Claims, is not a threat to your business’s future. In fact, initiating a lawsuit against the IRS takes the decision out of the hands of the agency and places it in the hands of a neutral federal judge, ensuring that your case is evaluated fairly and objectively.

It’s important to understand that the IRS itself is not even present in court during these proceedings. When you file a claim against the IRS, it is handled by the Department of Justice – Civil Tax Division, which is also a disinterested party. The DOJ’s role is to defend the IRS, but their involvement does not imply any personal or punitive action against you as a taxpayer.

Why Filing an ERC Refund Lawsuit Isn’t as Risky as It Sounds

Suing the IRS may seem intimidating, but it’s a standard legal process. Think of it like any other lawsuit—taking the matter to court means you’re removing it from the administrative process of the IRS and moving it into the hands of a judge who is neutral to both sides. This ensures that there will be a fair resolution and a definite end date to your case, unlike the indefinite waiting periods or uncertainty that can come from dealing directly with the IRS.

In fact, litigation is often the most direct and efficient path to resolving your case. By pursuing legal action, you’re not only ensuring your right to a fair hearing, but also gaining the certainty of having your case settled by a court. This judicial approach guarantees a resolution, allowing you to move forward with clarity and confidence, without fear of retribution.

Why an ERC Refund Lawsuit Might Be Your Best Option

While we generally steer our clients away from federal litigation due to the cost and long timeline, the current situation with the Employee Retention Tax Credit (ERC) presents an unusual opportunity for certain businesses. Here’s why litigation may be the best course of action in your case:

Unprecedented Situation with the IRS and DOJ

The Department of Justice – Civil Tax Division is currently facing significant workforce reductions, meaning they no longer have the same capacity to handle the volume of cases they’ve dealt with in the past. With fewer resources available, the government is being forced to prioritize which cases it defends. This creates a unique opportunity for businesses to challenge delays or denials head-on, as the government may not be able to fully devote the time and attention required to litigate each case. As a result, taking action now may increase your chances of success.

Broad Relief Program vs. IRS’s Narrow Interpretation

The ERC was designed as a broad relief program to support businesses impacted by the COVID-19 pandemic. The statute itself was intentionally inclusive, aiming to help as many businesses as possible. However, the IRS has adopted an overly conservative interpretation of the credit, limiting eligibility unnecessarily. In fact, the IRS has already lost significant ground in ongoing court cases, such as Stemson v. IRS, where litigants have successfully challenged the IRS’s restrictive stance. These cases have questioned whether the IRS’s position is even valid, particularly under the Administrative Procedures Act, which requires agencies to follow proper procedures when implementing new policies.

Increased Likelihood of Settlements

Recent results in federal court suggest the government is more inclined to settle ERC-related cases rather than risk a court ruling against them. The IRS knows that a negative decision in court would not only affect the individual case but could set a precedent for all ERC claims nationwide. This could potentially trigger a massive wave of litigation against the IRS for their failure to process claims in a timely manner. Therefore, the IRS is likely to seek settlements to avoid the risks of a negative ruling, making now an ideal time to pursue legal action.

Favorable Legal Environment

Based on the facts, we believe many businesses were significantly impacted by government orders during the COVID-19 pandemic. If COVID-related restrictions affected your business, you likely qualify for some measure of ERC relief. Given the broad nature of the relief program and the mounting challenges to the IRS’s interpretation, impartial federal judges are likely to side with plaintiffs who can demonstrate the pandemic’s impact on their operations.

Jury Trial Option and Faster Settlements

In federal district court, you have the option of having your case decided by a jury, providing a layer of impartiality that can be beneficial for your claim. This is especially important given the intense scrutiny the IRS is facing over its handling of ERC claims. Additionally, the government’s current predicament suggests that the DOJ Tax Division may be more inclined to settle cases quickly, especially if litigation trends continue to favor businesses. With this in mind, we believe the time is right for our clients to be proactive, press their claims, and potentially secure the refunds they’re entitled to faster than waiting for the IRS to act.

If you want to dive deeper into the reasons why litigation might be your best option, check out our article [ERC Refund Delayed? Here’s Why Filing a Lawsuit Might Be Your Best Option].

How to Get Started with an ERC Refund Lawsuit

If you’ve been impacted by the IRS’s delays or denials of your Employee Retention Tax Credit claim, now is the time to take action. With the IRS facing significant challenges in managing these cases, pursuing legal action could be your best chance to secure the ERC refund you deserve. By bringing your case to federal court, you remove the decision-making from the hands of the IRS and place it in the hands of a neutral federal judge. This can expedite the process and increase your chances of success. Our team is here to guide you through the legal process, assess your case, and help you navigate the complexities of an ERC lawsuit. To learn more about our ERC Litigation service, visit our service page.

Contact us today to schedule a consultation and take the first step toward recovering your ERC refund.

The IRS audit window for ERC claims is longer than many business owners realize. Understand the ERC statute of limitations →

Where is Your ERC Refund?

The IRS has publicly stated that it believes 80-90% of ERC claims are fraudulent. As a result, they are taking extreme caution when reviewing claims, even legitimate ones.

Here’s what’s happening:

• 1.4 million unprocessed claims are sitting in the IRS backlog.
• The IRS lacks the staff and resources to process claims quickly.
• The IRS is assuming most claims are fraudulent and subjecting them to extra scrutiny.

The reality? Waiting for the IRS to act is not a strategy. Businesses with large claims may remain in limbo indefinitely.

The IRS Has No Obligation to Process Your ERC Refund

One of the biggest misconceptions about the ERC refund process is that the IRS has a deadline to process claims. But under 26 U.S.C. § 6532(a)(1), the IRS can take as long as they want. If they choose to ignore your claim, you have no administrative recourse.

The government is banking on the fact that most businesses won’t take legal action. But you do have an option: filing a lawsuit.

How Filing a Lawsuit Forces the IRS to Act

If your ERC claim has been ignored or denied for six months, you have the right to file a lawsuit in federal district court or the Court of Federal Claims (26 U.S.C. § 7422). Litigation forces the government to respond to the actual merits of your ERC claim, rather than leaving it stuck in IRS limbo.

Why Lawsuits Work:

• It forces a resolution. Unlike the IRS administrative process, litigation guarantees your case gets heard.
• The DOJ handles the case, not the IRS. The Department of Justice (DOJ) Civil Tax Division handles tax cases, and they don’t have the same incentives to stall ERC claims.
• Judges and juries decide the outcome. The IRS no longer has full control over your refund.
• The government is settling cases. The DOJ lacks the resources to fight every claim, and many cases end in settlements.

Is Suing the IRS the Right Move for Your Business?

Not every business needs to file a lawsuit, but for those with large ERC claims ($250,000+), it can be the best path forward. Legal action may be the right choice if:

• Your ERC claim has been pending for six months or more.
• Your business was directly impacted by COVID-19 restrictions (e.g., revenue decline, operational disruptions).
• You have solid documentation to support your claim (financial records, payroll data, and business impact statements).

The Legal Process: What to Expect

If you decide to take legal action, here’s what the process looks like:

1. Confirm Your Claim is Valid – Ensure your Form 941-X was filed correctly and on time.
2. Wait Six Months from Filing – This is the minimum time required before filing a lawsuit.
3. File a Lawsuit in Federal Court – This officially challenges the IRS’s inaction.
4. Exchange Documentation – The government will review your claim and may propose a settlement.
5. Negotiate a Resolution – Many cases are resolved before trial.
6. Go to Court (If Needed) – A judge or jury will make the final decision.

Act Before It’s Too Late

The statute of limitations on ERC claims is closing fast. If your refund is stuck in IRS limbo, waiting is no longer an option. Filing a lawsuit could be the best way to get the money your business is entitled to.

Ready to take action? Our firm has helped hundreds of businesses file for ERC, and our controversy background makes us well equipped to handle ERC litigation. To learn more about firm and how we handle ERC lawsuits, visit our service page.

Contact us today for a free consultation and see if litigation is the right move for your business.

The IRS audit window for ERC claims is longer than many business owners realize. Understand the ERC statute of limitations →