Employee Retention Credit (ERC) lawsuits are piling up against the IRS

VaselineOctober 8, 2024

0 3 minutes read

Employee Retention Credit (ERC) lawsuits are piling up against the IRS

Lawsuits are coming against the IRS regarding tax refunds related to Employee Retention Creditand this could be just the beginning.

For example, an Ohio industrial staffing company forced to suspend hiring events because of the government shutdown is seeking more than $5 million in ERC-related tax refunds, according to a complaint filed last month. A North Carolina preschool also filed a lawsuit against the IRS seeking refunds owed more than 394,000.

These and other legal complaints come as the tax agency tries to untangle itself from a massive backlog dating back to the pandemic over erroneous statements of the ERC. Some employers have faced delays in processing applications for years, and now a few thousand are getting a claim rejection notice.

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In addition, the IRS admitted that some rejection letters were wrong after the companies reversed in an appeal.

Here’s why some employers are going to court for ERC refunds.

IRS overwhelmed by ERC claims

ERC is a refundable tax credit created to incentivize companies to keep their employees on the payroll during business closures caused by COVID. As previously reported by Kiplinger, abusive promoters have promoted the ability to claim ERCs to unsuspecting employers, leading to a glut of ERC errors and fraud.

The IRS has had its fair share of challenges in handling ERC claims. At one point, the National Taxpayers’ Advocate reported that backlog has grown to about 1.4 million.

It’s been about a month since The IRS has resumed processing applications after a gap of one year, and the agency is equal urging employers to participate in its voluntary disclosure program to repair ERC claims at a discount.

Despite these steps, many employers awaiting claims are not happy. Some say they haven’t even had the courtesy of an explanation or rejection notice explaining the delays.

IRS faces million dollar ERC lawsuit in Ohio

An Ohio industrial staffing company is suing for $5.1 million in refunds related to pandemic-era ERC claims.

The complaint filed in September alleges that The Job Center LLC, a limited liability company, is entitled to withholding credits for five quarters from 2020 to 2021 under the “government shutdown” provision.

Additionally, the plaintiff alleges that due to the COVID-19 pandemic, the business has been forced to suspend or modify regular operations to comply with state, local and federal orders.

That affected travel, group meetings, employment events and commerce at its locations in Ohio, Kentucky, Indiana, Pennsylvania, New Hampshire, Missouri, Georgia, North Carolina, Texas and Arizona, according to the filing.

Even though the company filed for a refund on June 20, 2023, the complaint alleges that the IRS failed to justify the delays or issue any rejection, audit or deficiency notices for the claims.

Because of the inaction, The Job Center LLC is asking the IRS to pay the credits owed and award the company interest and attorneys’ fees.

North Carolina nursery claims it was wrongfully denied ERC

In a related move, a North Carolina preschool filed a lawsuit against the IRS for more than $394,000 in employee retention credits, plus interest.

The complaint claims that Miss Marta’s Inc., operating as The Tree of Learningqualifies for the ERC under the “gross receipts” provision of the CARES Act because the company experienced a decline in gross receipts for six quarters during 2020-2021.

Learning Tree also claims it filed amended returns to claim the ERC on time. However, despite doing so, his application was dismissed after the moratorium period without review to justify the decision.

“After a lengthy delay, the IRS has been unable to process The Learning Tree’s request for an ERC refund,” the complaint says. “The IRS has delayed the processing of ERC applications to such an extent that it has effectively suspended the program.”

The IRS is responding to legal challenges

The aforementioned complaints add to a general list of lawsuits alleging that the IRS has not issued an ERC refund.

For example, an Arizona tax advisory and technology firm sued the agency, alleging that the moratorium period on ERC requests was “unlawful.”

IRS Deputy Commissioner Douglas O’Donnell did a statement justifying the delays in processing the ERC, which included:

The agency received an “unprecedented surge” in applications, and a significant portion were ineligible
Many ERC claims were “complex” and required manual review by an IRS employee
IRS had to add resources to ‘address unusually high volume of claims’

Should You File a Tax Refund Lawsuit Against the IRS?

Before filing a tax refund requestyou must first claim your refund or credit with the IRS using Form 941-X. In addition, a refund process cannot “commence before the expiration of 6 months from the date of application” unless the IRS rejects the application – then you can proceed immediately.

It’s worth noting that if you receive a rejection notice, you’ll have 30 days to appeal the decision to protect your two-year time limit for appeal or file a lawsuit.

VaselineOctober 8, 2024

0 3 minutes read

Vaseline

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