Pandemic Credit Refund Suits Expected to Surge as Deadline Nears

A growing number of employers who were denied pandemic-era tax credits are weighing whether to sue the IRS for their refunds, as a deadline to do so nears.

The employee retention credit, created by Congress to help businesses keep employees during the pandemic, is an ongoing headache for the IRS, which paused processing claims for over a year because of widespread fraud issues.

The IRS denied 28,000 ERC claims during the summer of 2024, according to the National Taxpayer Advocate annual report released in January. Now, taxpayers who received denials during that time are coming up on the statute of limitations to sue the IRS, which is two years from the date of the denial letter.

“The federal district courts are going to get flooded with cases,” said Tracy Martinez, lead of tax controversy at Omega Accounting Solutions.

The deadline is particularly important for taxpayers who took their denials to the IRS Independent Office of Appeals, an alternative to litigation, to get refunds. Tax practitioners say their clients are facing long delays in appeals, and some don’t have their cases assigned to any officer.

The Taxpayer Advocate Service is working with IRS to create clear procedures for taxpayers requesting an extension on the deadline to file a refund suit.

“We are acutely aware that the clock is ticking,” National Taxpayer Advocate Erin Collins, who leads TAS, said in a statement. “Absent immediate IRS agreement to execute these extensions, taxpayers will be unjustly forced to choose between costly litigation and abandoning refund claims. Taxpayers should not bear the consequences of delays that were outside their control.”

An IRS spokesperson said the agency is reviewing the issue and evaluating “potential administrative options.”

“We understand the importance of preserving taxpayers’ rights while balancing the need to ensure that claims are reviewed thoroughly and consistently, particularly given the volume of ERC claims received and the complexity and compliance risks associated with this credit,” the spokesperson said in an email.

Appeals Delays

Much like the rest of the agency, the IRS appeals office lost more than a quarter of its workers over the past year as the Trump administration pushed to slash the federal government. The average case inventory per appeals employee increased to 49 cases in fiscal year 2025, up from 28, according to the National Taxpayer Advocate report.

Taxpayers typically file an extension with their appeals or exams officers. But because some ERC cases haven’t even been assigned, it’s unclear who the taxpayer should reach out to about the extension, said Justin Elanjian, Frost Law managing director.

“Taxpayers need to start thinking about their actions,” Elanjian said. “What are they going to do if appeals doesn’t move quickly enough? They can’t wait until the last day.”

Martinez said she’s gotten just four of more than 100 ERC denial cases she’s working on assigned appeals officers. Kenneth Dettman, an accountant and CEO of tax data company TaxNow, said he has about 100 clients with denials and less than a dozen cases have an assigned appeals officer.

“I can’t for the life of me get an appeals conference,” Dettman said, noting that some cases were resolved without appeals. There were also a few instances where appeals conferences were scheduled but then pushed back, he said.

The Taxpayer Advocate expects delays in the appeals office to continue.

“Until the IRS restores staffing to sustainable levels, taxpayers will continue to face prolonged waits and uneven case handling even after meeting every procedural requirement to obtain Appeals review,” Collins said in her annual report.

Processing Headaches

The IRS has already faced dozens of lawsuits over employee retention credit claims and years of headaches. The agency paid out $283 billion in ERC claims, more than 80% of which were paid after 2022, when unemployment had already returned to its pre-pandemic level, according to the Government Accountability Office.

IRS CEO Frank Bisignano told lawmakers during a Wednesday hearing the agency had less than 29,000 ERC claims in its compliance arm. The agency told GAO that as of the end of last year it closed all ERC claims, other than 41,000 in exam or appeals. It did not provide GAO with documentary evidence of the claim or what “closed” means, according to the report.

Tax practitioners said they have clients who still haven’t received notice from the IRS on whether their claims were accepted.

“I’d give it a little bit more time,” said Tom Cullinan, a tax controversy lawyer at Chamberlain, Hrdlicka, White, Williams & Aughtry, on his advice to clients in this situation. “But if we don’t start seeing claims move in the next couple months, I think those taxpayers are going to have to go to court.”