The IRS and the Employee Retention Credit (ERC) are being sued more and more, and many people are asking for refunds connected to this credit. Businesses are getting more and more angry because they think they are due big refunds under the ERC program, which was made to help employers during the COVID-19 pandemic.
This legal wave could be the start of a bigger fight between employers and the IRS over how the agency has treated these claims as more companies join the fight.
In this case, an Ohio-based industrial staffing business had to stop hiring people during the pandemic because the government put limits on it. A court filing from September says that the company is now trying to get back more than $5 million in ERC claims.
A daycare center from North Carolina is also suing, this time for more than $394,000 that it says it is due. These cases are not unique; they are part of a bigger trend of employers going to court to challenge how the IRS handles ERC claims.
What is the problem with the ERC
The ERC, which was made to help companies keep workers when they had to close because of a pandemic, has caused a lot of confusion and anger. The IRS has had a hard time keeping up with the huge number of claims, which has caused a big backlog. Many employers who asked for the credit have had to wait years for their claims to be processed.
Now, thousands of businesses are getting notices that their claims have been denied. To make matters worse, the IRS has admitted that some of the rejection letters were sent out by mistake. This has put many businesses in a mess as they try to get the money they think they are due.
Getting into these lawsuits is partly because of how the IRS handles ERC claims. The ERC was created as a tax credit that can be refunded to encourage companies to keep their workers on the job during COVID-related shutdowns. However, aggressive marketing from promoters who said it would be easy to get these points led some businesses astray.
This caused a lot of claims, and a lot of them were either false or fake. There was a time when the National Taxpayer Advocate said that the IRS had a backlog of about 1.4 million ERC cases.
The IRS just started working on these claims again after a year-long break, but the agency is still having a hard time getting caught up. Employers have even been urged to join a Voluntary Disclosure Program, which gives them a chance to fix their ERC claims at a lower cost.
Even with all of these attempts, many businesses are still unhappy. A few people have said that they haven’t even gotten basic information about the state of their claims, like a formal notice that their claims were denied or an explanation for the delay.
The impact of the IRS delays
A company in Ohio called The Job Center LLC is fighting the IRS for $5.1 million in back ERC refunds that it has not yet received. Under the part of the case that talks about government shutdowns, the company is supposed to get retention credits for five fiscal quarters in 2020 and 2021.
The business says that the pandemic made it have to change how it did business in several states to follow local, state, and federal rules. This got in the way of normal business activities like travel, group meetings, and hiring events.
The company says that even though they filed for these refunds in June 2023, the IRS has not explained why they have been delayed or sent any official notices of disallowance, audit, or deficiency. So, The Job Center LLC is asking for more than just the credits that are due. They want interest and attorney fees as well.
In a case similar to this one, Miss Marta’s Inc., a daycare that goes by the name The Learning Tree, is fighting the IRS for more than $394,000. The daycare says it is eligible for the ERC because its gross receipts dropped by a lot over six fiscal quarters in 2020 and 2021.
The company says it filed revised returns on time, but its claim was turned down without being looked at because the IRS stopped processing it. The complaint says that “the IRS has slowed down processing ERC claims to the point where it has essentially shut down the program.”
Because of these and other cases, the IRS has given several reasons for the delays. Deputy Commissioner Douglas O’Donnell admitted that the office was getting a huge number of claims, and a lot of them weren’t valid.
He also said that some claims were so complicated that they had to be looked over by hand by IRS employees, which added to the delay. The IRS also had to add more staff to deal with the large number of cases.
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