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Client Alert: How to Get Your Employee Retention Credit Claims Processed Now that the Federal Government Has Reopened

The longest recorded government shutdown is finally over. As many government agencies return to normal business operations, many small business owners still have one burning question: how do I get my employee retention credit (“ERC”) claims processed with the Internal Revenue Service (“IRS” or the “Service”).   
 

• If your ERC claim was denied, often through an IRS Letter 105-C, you have two years from the date of disallowance to file a refund suit in federal court to challenge the Service’s decision.

 

• If it has been more than 6 months since you filed your ERC claim and the Service has not responded, you have three years from the date you filed the amended employment tax return to bring a refund suit in federal court.

 

• Based on your specific facts and circumstances, if you do not file by the identified deadline, you will not be entitled to funding. Government shutdowns do not pause the statute of limitations. Moreover, administrative remedies to resolve unpaid funds are quickly becoming unavailable.

Unfortunately, due to the overwhelming number of unprocessed ERC claims and decreased IRS staffing, many employers could be empty-handed unless they take immediate proactive steps. This article discusses three essential considerations for employers with pending ERC claims:

1. The Statute of Limitations on Payment

Internal Revenue Code provisions establish the deadline to file a refund claim and the applicable window to file a lawsuit if the Service does not administratively process the claim.

The ERC was claimed by filing an amended employment tax return, through a Form 941-X. 26 U.S.C. (“IRC”) § 6511, establishes when an administrative claim must be filed. IRC § 7422 provides that a taxpayer cannot file a refund suit unless a timely administrative claim was filed first.

IRC § 6532(a) controls when a taxpayer can file a claim with the United States District Court or the Court of Federal Claims. Specifically, a taxpayer may file a claim with the appropriate court once six months have passed without IRS action or upon a formal disallowance, and if a disallowance notice is issued, you typically have two years from that notice to file suit in federal court. Finally, 28 U.S.C. § 1346(a)(1) provides the United States district courts (and the Court of Federal Claims) jurisdiction over properly filed tax refund actions.

2. Administrative Remedies

Many business owners were concerned about the scrutiny they would face from the DOJ if they filed a claim in federal court. While this is an important factor, it should not be determinative. However, before any claim is filed, an expert in this area should review the validity and basis of the ERC claim and determine whether it is advantageous and appropriate to file a refund claim.

Nonetheless, for taxpayers still wishing to exhaust all administrative remedies prior to filing a lawsuit, there may still be time to work with the Taxpayer Advocate Service (“TAS”) to request the processing of an ERC claim. Taxpayers who want to work with TAS should execute and complete an IRS Form 911 (Request for Taxpayer Advocate Service Assistance). Please note, TAS is generally used for taxpayers who will face economic hardship if the Service does not provide a resolution to their matter.

Whether the taxpayer has exhausted all administrative remedies is quickly becoming moot as it will be incredibly difficult for TAS and the Service to systematically process such a large quantity of refund claims before the statute of limitations to file a refund claim in federal court expires.

3. Filing a Refund Claim in Federal Court  

Prior to the taxpayer deciding to file a refund claim with a federal court, the basis upon which the ERC claim is effectuated must be heavily scrutinized, substantiated, and reviewed.

In general, there are two avenues for proper ERC funding: (1) a decline in gross receipts; or (2) government ordinances that resulted in a substantial shutdown of business operations. Unfortunately, the basis of the claim is generally not provided on the amended Form 941 and it is nearly impossible for the Service to understand and effectively analyze whether your claim is valid without additional information and documentation.

After a refund claim is filed, the Department of Justice (“DOJ”) civil division will assign an attorney and will most likely file an answer to your claim. From there, it is best to communicate with the DOJ attorney and inquire as to whether the parties should exchange informal discovery or wait for a scheduling order from the court and work through a more formalized process. During and prior to this process, taxpayers should consider who has relevant first-hand knowledge of the filing, whether that communication is privileged, and what other evidence is available to support their claim.

In general, ERC refund suits based on a decline in gross receipts that can be adequately substantiated and effectively communicated to the DOJ can be settled without the need for extensive discovery, motions, or trial. However, claims that are based on government suspensions or other guidance may require more proof beyond the numbers of a decline in gross receipts. Ultimately, whether based on the gross receipts test or government suspensions, if the case cannot be settled the matter can be sent to mediation, arbitration, or trial.  

4. Looking Forward

Due to the federal government shutdown, diminishing IRS staffing, and almost 600,000 unprocessed ERC claims, business owners are now forced to decide whether to wait for the overburdened IRS to process their ERC claim administratively and risk passing statutory deadlines, or alternatively, pursuing immediate relief in federal court. The team at Whiteford, Taylor & Preston includes former DOJ Tax Division and IRS attorneys. We are more than happy to discuss your options, analyze your likelihood of success, and develop a strategy to facilitate a resolution to your matter before your time to decide runs out.

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The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.