The decision to initiate a lawsuit against the IRS over unpaid Employee Retention Credit (ERC) claims is a complex one that should be approached with caution and thorough preparation. Fox Rothschild attorneys emphasize evaluating key factors before proceeding with any legal action. Among the primary considerations are how a business qualified for the ERC, the magnitude of the claim in question, and the company’s access to necessary capital resources.
Initially conceived as a measure to support businesses during the COVID-19 pandemic, the ERC has been fraught with complications, including fraudulent claims often encouraged by tax credit promoters. The discovery of rampant ERC fraud prompted the IRS to impose a moratorium on processing claims, while also implementing more stringent measures to scrutinize eligibility.
For businesses considering legal action, there are specific circumstances under which they can file a suit. Notably, businesses are entitled to seek a refund directly from the IRS if they have not received a refund or disallowance notice within six months of claiming the ERC. Suits can be lodged in the federal district court where the business operates or at the Court of Federal Claims in Washington, D.C., with the Department of Justice attorneys representing the IRS.
- Qualification Method: Businesses have primarily two routes to qualify for the ERC—experiencing a substantial decline in gross receipts or partial/full suspension of operations due to government orders. Claims rooted in the gross receipts test are generally clearer and better positioned for litigation as opposed to those relying on the more nebulous government orders test.
- Claim Size and Access to Capital: The financial aspect of pursuing litigation cannot be overlooked. Lawsuits can be financially burdensome, and it might not be viable to litigate for smaller claims. Alternative fee arrangements such as contingency fees may offer a solution; however, they come with their own set of valuations to consider.
Decisions around suing the IRS are not to be made lightly. Businesses should weigh other accessible financial routes or be prepared for the potential costs and prolonged nature of litigation, as well as the possibility of solutions provided in conjunction with legal counsel. For those businesses whose operations hinge on the prompt acquisition of ERC funds, insight into preemptive readiness and strategic planning could make a crucial difference.
For further insights into considerations for ERC-related litigation, you can explore the full discussion by attorneys at Fox Rothschild here.