A Major Lawsuit Against the IRS; Why Your ERC Claim Status is Taking So Long

At a glance

• The main takeaway: As taxpayers continue to experience exceptionally long delays related to Employee Retention Credit (ERC) processes, the IRS is now under fire for using automated software to assess potentially fraudulent claims for the COVID-era employment tax credit.
• The impact on your business: Many businesses continue to wait for ERC refunds, which may be further prolonged if the courts approve a block on the automated software.
• Next steps: Whether you’re waiting for the status of a submitted claim or want to learn more about ERC, Aprio’s Employment Tax Services team is available to help.

The full story:

The IRS has faced unprecedented challenges in recent years with processing tax claims, particularly regarding the Employee Retention Credit (ERC). The ERC is a pandemic-era relief program that was launched in 2020 to encourage employers to retain employees during the Covid-19 lockdowns by providing businesses a refundable tax credit. In response, the IRS received millions of ERC claims, each of which require extensive investigation to confirm validity and prevent refunding fraudulent claims. Now, five years after the program was established, the IRS is still struggling to process the claims and distribute refunds requested years ago. As of late October 2024, the IRS still had over 1.2 million claims to process, and the program has cost billions more dollars than initially projected.

In addition to the overwhelming volume of claims, the IRS continues to face challenges with receiving adequate funding to hire more staff to process the claims. The IRS has used a software program to automate and expedite the validation process by flagging suspicious and potentially fraudulent ERC claims. However, a lawsuit, Stenson Tamaddon, LLC v. IRS, No. CV-24-01123 (D. Ariz.), has been filed on the basis that the software program has disallowed claims in bulk, rejecting many legitimate claims in the process. The plaintiffs have requested the court issue an injunction to block the IRS from using the software.

Ramifications of the lawsuit

Given the IRS’ current backlog, a granted injunction could result in extreme consequences for the IRS. The IRS is required to pay interest on long-delayed or rejected claims that it may later grant under a taxpayer’s appeal, and the Taxpayer Advocate Service, an independent organization within the agency, stated the IRS has already paid out $8.1 billion in interest on delayed claims.

Worse still, many businesses have resorted to refund litigation to file federal lawsuits against the IRS for their outstanding claims. In many cases, this approach has been successful and more efficient than waiting for the IRS to process their claim.

Evolving deadlines

To further complicate matters, the original deadline for new claims under the ERC program has been pushed back multiple times, as detailed in previous articles. On January 31, 2024, the House of Representatives intended to terminate the program immediately and extend the statute of limitations for refund audits to six years from the date of submission via The Tax Relief for American Families and Workers Act of 2024. However, this bill failed to pass in the Senate, meaning taxpayers can continue to claim the ERC until April 15, 2025. Further, the moratorium on processing new claims remains in place for claims filed after January 31, 2024, so any new claims submitted since this date are unlikely to be processed soon, if ever.

Next steps

While pursuing refund litigation may be a tempting solution to that ERC refund you’ve been waiting for, it can be expensive and there is no guaranteed resolution. Given the current backlog of claims, though, ERC claim refunds will likely spill over into 2026.

If you have questions about your claim status or want more information on ERC, Aprio is available to help. You can reach out to our ERC and Employment Services team at ERC2024@Aprio.com or schedule a consultation here.

Related Resources/Assets/Aprio.com articles/pages

Employee Retention Credit (ERC) Update – Voluntary Disclosure Program Reopened, IRS Special Withdrawal Program Restarts for a Limited Time, and Agency Continues Compliance Work

Employee Retention Credit (ERC) Update: Payouts for Low-Risk Claims are Coming but the Moratorium is Here to Stay

IRS reopens Voluntary Disclosure Program to help businesses with problematic Employee Retention Credit claims