When the Employee Retention Credit (ERC) first became available, many businesses relied on Professional Employer Organizations (PEOs) to file their claims. It seemed like the simplest path—PEOs were already managing payroll, so why not let them handle the paperwork associated with filing the ERC claim too?
But now, as ERC refunds remain delayed and the IRS increases scrutiny, a key question is surfacing: who is actually responsible for defending these ERC claims if something goes wrong?
The reality is that while PEOs may have submitted the filings, the responsibility for the ERC refund ultimately rests with the business itself. This creates a gray area—especially when litigation becomes necessary to move a claim forward. Businesses that filed through PEOs often face an extra layer of complexity in pursuing their refunds, not because the claims are invalid, but because the process requires cooperation between the employer, the PEO, and the legal team.
In this article, we’ll break down what role PEOs play, why businesses still bear the ultimate responsibility, and how litigation can help clarify and resolve ERC refund delays even when PEOs are involved.
What Role Did PEOs Play in ERC Filings?
For many businesses, especially small and mid-sized companies, working with a Professional Employer Organization (PEO) seemed like the easiest way to file their ERC claims. PEOs were already processing payroll taxes, so naturally, they became the ones to submit the required amended returns (Form 941-X) on behalf of their clients.
On paper, this arrangement made sense. The PEO handled the filing logistics, the business expected the refund, and everyone assumed the IRS would process claims without issue. But as refunds dragged on and litigation became a more realistic option, an important complication emerged: the filing technically belongs to the PEO.
That technical detail matters because in ERC litigation, the PEO is often required to be part of the case. The business is the rightful claimant, but because the PEO submitted the paperwork under its EIN, the lawsuit can’t move forward without at least acknowledging the PEO’s role. This doesn’t mean the PEO has any claim to the refund—it doesn’t. But it does add a layer of coordination that businesses who filed on their own don’t face.
Adding to the complexity, not all PEOs approach this issue the same way. Larger PEOs often resist involvement because of the scale of their filings. Many submitted ERC claims for hundreds or even thousands of clients under consolidated filings. Agreeing to participate in litigation for one client could raise concerns about opening the door to additional cases they’d rather avoid.
Smaller PEOs, on the other hand, are sometimes more willing to cooperate. With fewer clients and less exposure tied up in ERC filings, they tend to recognize that there’s little downside in allowing litigation to move forward.
Most PEOs fall somewhere in between, which means cooperation varies case by case. Some are quick to step aside, while others require careful negotiation.
The result? For businesses that filed through a PEO, navigating an ERC refund claim requires not just legal expertise but also strategic coordination with the PEO to keep the process moving.
Who Is Really Responsible for the Refund?
Some business owners assume that if the IRS asks for more documentation—or issues a disallowance letter—their PEO will step in to defend the claim. After all, the filing was made under the PEO’s EIN, so it feels like they should be the point of contact with the IRS.
But in practice, that’s not how it works. While the PEO is technically the filer, defending the claim isn’t their responsibility—and most won’t take it on. Their role ended with submission. If the IRS challenges eligibility, it’s the business itself that has to supply the documentation and legal arguments to support the credit.
The problem is that most PEOs never prepared this kind of supporting documentation in the first place. They submitted the amended return but didn’t build files with government orders, legal opinions, financial analyses, or operational narratives. That leaves many businesses in a tough position: they’re responsible for defending the claim, but they don’t have the evidence needed to do so.
This is where businesses that filed through PEOs often find themselves at a disadvantage. The claim may be valid, but without a defensible file, the business needs to reconstruct the supporting materials before it can move forward—especially if litigation becomes necessary.
Litigation With a PEO — What Makes It Different?
When a business decides to pursue litigation for an ERC refund that was filed through a PEO, the process comes with an extra layer of complexity. Because the filing was made under the PEO’s EIN, the PEO technically has to be included in the lawsuit.
This doesn’t mean the PEO is fighting over the refund. Instead, it’s about managing their procedural role in the case. As our firm Owner, Sam Brotman, often explains to clients who filed under PEOs:
“Everyone agrees where the plane should land—the refund belongs to you. The question is what flight path gets it there.”
That “flight path” varies depending on the PEO:
- Smaller PEOs often step aside, cooperating enough to let the business and its attorneys move the case forward.
- Larger PEOs may resist more strongly, especially if they’ve filed ERC claims for hundreds of clients under consolidated filings. In those cases, they may be hesitant to participate in litigation that could complicate how their broader filings are viewed.
- Most PEOs fall somewhere in the middle—willing to collaborate when asked, but not eager to take an active role.
For the business owner, this usually doesn’t mean a direct burden. The challenge lies more with the attorneys, who need to coordinate with the PEO and manage the additional procedural steps.
The key takeaway: including a PEO in litigation may add time and complexity, but it doesn’t stop the claim from moving forward. With the right strategy, the “plane” still lands—the refund gets resolved—it just requires more navigation along the way.
Rebuilding a Strong File Post-PEO
One of the biggest challenges for businesses that filed ERC claims through a PEO is the lack of supporting documentation. PEOs typically submitted the amended returns, but they didn’t prepare the evidence needed to defend those filings if questioned by the IRS.
That’s where legal counsel steps in. To move an ERC claim forward—especially in litigation—you need a defensible file that goes beyond a simple payroll form. At Brotman Law, we help clients rebuild that file from the ground up, creating the documentation their PEO never provided.
A strong ERC litigation file often includes:
- Government orders that directly impacted the business, tied to specific quarters.
- Gross receipts analyses that demonstrate whether the business qualifies under the revenue test.
- Legal opinion letters that explain how the business meets ERC requirements under the law.
- Industry or contractual evidence showing compliance with federal mandates where state orders were limited.
By compiling these materials into a structured file, businesses are better equipped to present a complete and persuasive case in court. This process not only strengthens the litigation itself, but also ensures the refund is protected from potential claw backs down the road.
Why Businesses Pursue Litigation Anyway
For companies that filed through a PEO, litigation can feel like an added hurdle. Coordinating with another party, rebuilding documentation, and managing a legal process may sound like extra work. But for many businesses, it’s the only path that brings certainty and protection to an otherwise open-ended process.
Litigation offers two major advantages:
- It starts the clock. Once a lawsuit is filed, the government has 60 days to respond. That’s a stark contrast to the administrative process, where claims can sit untouched for years.
- It protects your refund. Under the new six-year audit window, even refunds that are eventually paid can be clawed back. But once a case is resolved in court—through settlement or judgment—that refund is final and no longer subject to claw backs.
For businesses waiting on substantial ERC refunds, this combination of accountability and finality is powerful. Even if a PEO adds procedural steps, litigation remains the surest way to move a claim forward and secure the refund for good.
Navigating ERC Refunds with a PEO
For many businesses, filing for the ERC through a PEO has created extra uncertainty. Owners often feel “stuck” because they aren’t getting clear updates—neither from the IRS nor from their PEO. And when updates do come, they’re often vague, offering little insight into when or if the refund will actually arrive.
The good news is that you’re not out of options. Litigation can still move your claim forward, but it requires careful coordination and strong supporting documentation to fill in the gaps your PEO didn’t provide. At Brotman Law, we rebuild ERC files, manage the PEO component of litigation, and pursue legal strategies that both enforce timelines and protect refunds from claw backs.
If your ERC refund was filed through a PEO and you’re still waiting, now is the time to get clarity on your options. Contact Brotman Law to learn more about how litigation works in these cases and whether it may be the right next step for your business.