The Employee Retention Credit (ERC) was introduced as part of the March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act to encourage businesses to maintain their workforce during the economic disruptions of the COVID-19 pandemic. Over time, legislative developments—most notably through the December 2020 Consolidated Appropriations Act and the March 2021 American Rescue Plan Act—expanded both the eligibility criteria and the potential credit amounts.
Despite the intention of the ERC to serve as a swift economic lifeline, numerous businesses have encountered significant delays in receiving their anticipated funds from the Internal Revenue Service (IRS or the Service). These delays create significant cash flow challenges, as many small business owners have taken on additional liabilities or made operational decisions in reliance on receiving ERC refunds. We are providing this update to help our employer and business clients understand why their ERC funds may be delayed and how we can help them to address their issues.
- Administrative Denials
The Service issues IRS Letter 105-C to formally notify a taxpayer that the Service has denied—in whole or in part—a previously filed claim for refund or credit, including a claim for the ERC. A Letter 105-C recites the statutory authority for disallowance, identifies the tax period(s) at issue, and explains that the Service has concluded the taxpayer is ineligible for the ERC because the factual and legal predicates—such as experiencing a qualifying full or partial suspension of operations due to a governmental order, sustaining the requisite decline in gross receipts, or satisfying the “recovery startup business” rules—were not met, or because the claim was untimely, mathematically erroneous, duplicative, or unsupported by substantiating documentation.
Although Letter 105-C serves as a final determination that starts the limitations period for litigation in either the United States Court of Federal Claims or the appropriate United States District Court, it also affords an administrative avenue for redress: the taxpayer may, within 30 days of the letter’s date (or the period specified in the letter), submit a written protest requesting consideration by the IRS Office of Appeals, setting forth a detailed statement of facts, the legal basis for entitlement to the ERC, and copies of all corroborating records (e.g., governmental shutdown orders, gross-receipts computations, contemporaneous payroll journals, and affidavits establishing eligibility).
The protest must be signed under penalties of perjury, mailed by certified mail to the address shown on Letter 105-C to preserve proof of timely filing, and accompanied by a Power of Attorney if a representative is lodging the protest on the taxpayer’s behalf. If the IRS Office of Appeals does not grant relief, the taxpayer may, within two years of the date of the disallowance, file a refund suit; however, prudence dictates that taxpayers first exhaust administrative remedies, ensure that all ERC eligibility criteria are meticulously documented, and, where appropriate, consider filing a superseding or protective claim to toll limitations while the dispute is administratively pending.
- Other Paths to Relief
When funds remain unpaid despite persistent efforts to communicate with the IRS, such as through an appeal and protest following the issuance of a Letter 105-C, taxpayers may consider two paths forward.
First, taxpayers could turn to the Taxpayer Advocate Service (TAS) for assistance with their delayed ERC funds. As an independent arm of the IRS, the TAS is tasked with assisting taxpayers who face financial hardships or other obstacles in resolving tax issues. For prolonged ERC refund delays, the TAS can serve as a valuable intermediary, providing guidance on how to supply missing materials or clarifying whether an audit or special review is causing a hold on the funds. Engaging with the TAS requires submitting a request for assistance that outlines the nature of the problem, the hardship faced, and the steps taken to remedy the issue. If the TAS accepts the case, they will liaise directly with the relevant IRS department to obtain an update or push for a timely result.
Second, entities may contemplate legal action if they believe the IRS is unlawfully withholding the ERC refund. The law permits taxpayers to sue the United States for their claimed refund if the IRS has denied their refund claim, or more commonly, if the IRS has failed to act on the refund claim within six months.
When deciding whether to bring a lawsuit, it is vital for business owners to assess both the likelihood of success and the costs associated with federal litigation. Tax litigation can be time-consuming, and prevailing in court often hinges on the sufficiency of documentation establishing that the business met ERC eligibility standards. Thus, entities typically consult legal counsel who is experienced in federal tax disputes to evaluate whether the facts and circumstances merit the filing of a claim. As part of this assessment, careful consideration should be given as to where to file; while both U.S. District Courts and the U.S. Court of Federal Claims handle refund claims, the circumstances and strategy of any particular case can favor filing in one court over the other.
In recent months, the IRS has also indicated heightened oversight of ERC claims due to concerns about abuse. This scrutiny underscores the importance of thoroughly documenting the basis for the credit and vetting any potential claims before a lawsuit is filed. Although legitimate claims should not be discouraged, businesses that file claims without a clear record of qualifying circumstances may find themselves subject to further inquiries or even penalties for inaccurate reporting.
