If Not Now, When? Is it Time to Consider a Refund Suit to Expedite ERC Processing by the IRS?

Unfortunately, it looks like taxpayers who filed for the Employee Retention Credit (“ERC”) — both before and after the IRS’s moratorium on processing ERC claims — may be waiting years before they receive their emergency COVID-relief payments. Luckily, taxpayers have a mechanism to expedite the process. 

Official Reports of Delays in Processing ERC Claims

While there are plenty of anecdotes about delays in processing the ERC, the National Taxpayer Advocate’s annual report to Congress, provided official, eye-opening statistics about the concerning delays by the IRS in processing ERC claims:

1. “Starting in mid-July, the IRS all but stopped processing these returns while it revised its procedures to handle the complexity and increase in aggressive and misleading marketing. . . .”  Annual Report at 10. That is, the IRS all but stopped processing ERC claims even before it announced the moratorium on processing new ERC claims in September. 
2. “Though it indicated it would continue to process ERC claims filed before the moratorium at a slower pace due to stricter compliance reviews, the IRS has all but ceased processing as taxpayers continue to file new ERC claims at a significant rate.”  Annual Report at 11. That is, even though the IRS indicated it would continue to process the ERC claims that were filed before the moratorium, the IRS is not doing so. 
3. “From mid-August through mid-October 2023, taxpayers filed ERC claims at an average weekly rate of approximately 45,000 while IRS processing of these claims slowed to an average weekly rate of just 150.” Annual Report at 11.  “Continuing at this rate, the IRS will carry over almost 1.3 million ERC claims into FS 2024.”  Annual Report at 11.
4. “[T]he National Taxpayer Advocate is very concerned that the IRS will not begin working the majority of these claims until after the close of FS 2024.”  Annual Report at 11.

The National Taxpayer Advocate’s annual report to Congress provided this figure regarding ERC processing: 

Additionally, during the IRS’s February 8, 2024 webinar regarding the ERC, the IRS said it is not processing ERC claims that were received after the start of the moratorium and it has no estimate when it will start processing those claims.

On February 15, 2024, IRS Commissioner Daniel Werfel stated that the IRS is now processing between 1,000 – 2,000 claims per weeks. Assuming the National Tax Advocate’s estimate of a backlog of 1.3M starting in 2024 is correct and no new ERC claims are received, it will take the IRS between 1,300 and 650 weeks (or 25 – 12.5 years) to process all the outstanding ERC claims.

So, based on the National Taxpayer Advocate’s annual report and the IRS’s statements, it is very likely taxpayers who claimed the ERC will be waiting a significant amount of time to receive their ERC funds.    

Taxpayers Can Expedite ERC Claims through Refund Suits

Taxpayers who are certain they qualify for the ERC — such as taxpayers who qualify under the gross receipts test or who clearly had operations suspended due to government orders (restaurants, certain surgery centers, dental offices, theatres, etc.) — should consider initiating a refund suit to expedite the processing of their ERC claim. 

A taxpayer who has not received from the IRS the notice of disallowance of the refund claim within six months from the date of filing the refund claim may file a “suit for refund of taxes paid in the U.S. district court where the taxpayer resides (or where the corporation has its principal place of business), or in the Court of Federal Claims.” IRC § 6532(a); Internal Revenue Manual 34.5.2. “A refund suit begins when a taxpayer files a complaint in a U.S. district court or Court of Federal Claims. In the district courts, the taxpayer must deliver a copy of the summons and complaint to the appropriate U.S. Attorney and the Attorney General by registered or certified mail. See Fed. R. Civ. P. 4. In the Court of Federal Claims, after the taxpayer files his complaint, the clerk serves copies on the Attorney General. Cl. Ct. R. 4. The Government has 60 days from the service of the summons and complaint (or from the service of the complaint in the Court of Federal Claims) in which to file an answer.”  Internal Revenue Manual 34.5.2. 

The hope with filing a refund suit is that the IRS will review and approve the employer’s ERC claim prior to litigating the claim. However, it is possible the IRS would deny the ERC claim and require litigation. Therefore, taxpayers who decide to initiate a suit should be fully prepared to litigate the ERC claim. Accordingly, before taxpayers decide to initiate suit for a refund of taxes, they should have all documents required to substantiate their claim, including, but not limited to, quarterly financials, wages paid per employee per quarter, PPP information, government orders, and substantiation of full or partial suspension of operations.

Conclusion

Filing a suit for a refund of the ERC may be a drastic, last-resort measure, but based on the likely significant delays in ERC processing, employers who are certain they qualify for the ERC should consider initiating a refund suit to expedite the processing of their ERC claim.