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:
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Revenue Decline Test: A significant drop in gross receipts—50% in 2020 or 20% in 2021—compared to the same quarter in 2019.
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Full or Partial Suspension Due to Government Orders: The business was affected by a government-mandated closure or restriction that impacted operations.
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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
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Documented revenue drop that meets IRS thresholds
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Payroll records aligned with Form 941-X filings
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Clear government orders with direct operational impact
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Internal memos or legal analysis supporting eligibility
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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:
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Used a Professional Employer Organization (PEO) or third-party filer
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Partial suspension involved indirect effects or multi-state rules
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Revenue dipped just below thresholds but not in all quarters
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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
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Relied on supply chain disruption without proving direct impact
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Used vague or unverified government orders
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Minimal financial drop, close to eligibility thresholds
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Filed through an ERC promoter with limited documentation
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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)
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No measurable drop in revenue and no valid suspension
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Relied on generic “COVID impact” without linking to business operations
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No records to support claim amount or eligibility
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Claim filed by an ERC mill or promoter with questionable tactics
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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:
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Can you produce your 941-X and ERC calculation files?
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Do you have documentation showing how your operations were impacted?
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Did you claim based on clear, traceable government orders or revenue losses?
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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.
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Tier 1 and 2? Consider litigation if your refund is delayed or denied.
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Tier 3? Proceed with caution—get a legal review first.
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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.