Can the U.S. Tax Court Hear ERC Lawsuits?

As more and more taxpayers consider filing lawsuits to receive an ERC refund, it is important to understand where the lawsuits can be filed.

Before a taxpayer is legally allowed to file a refund lawsuit in court, taxpayers must first file a claim for refund with the IRS. If a taxpayer does not first allow the IRS an opportunity to review and act on a refund claim, the taxpayer cannot yet go to court. The Tax Code allows the IRS six months to review a refund claim before a taxpayer is allowed to file a refund lawsuit in court. If you are a taxpayer who has waited six months or more for the IRS to pay an ERC refund, you may (and should be) be curious about the possibility of a refund lawsuit.

There are many considerations that should be weighed when deciding whether to file a refund lawsuit. One such consideration is the court in which the case would be litigated. Subject to narrow exceptions that are unlikely to apply to most taxpayers, the Tax Code provides that refund lawsuits can be heard only in U.S. district courts or the U.S. Court of Federal Claims.

But what about the scenario where a taxpayer has been paid a refund and the IRS seeks to recoup the refund from the taxpayer? There are a few avenues the IRS could pursue, but importantly the only avenue likely to end up in court would be an erroneous refund lawsuit. And that action would be heard in a U.S. district court. While the U.S. Tax Court has jurisdiction over deficiencies of income, estate, gift, and certain excise taxes, the court does not have jurisdiction to determine deficiencies of employment taxes. The Tax Court does have jurisdiction to determine worker classification issues (i.e., if a worker is an employee or independent contractor), so it is conceivable that some ERC issues could make their way to the U.S. Tax Court. But that seems much less likely than the erroneous refund lawsuit route, mentioned above.

Another, and more likely way, for ERC issues to make their way to the U.S. Tax Court is through the Collection Due Process procedures. In many Collection Due Process cases, the underlying tax liability is an issue that can be considered by the court. Of course, to get to this stage a taxpayer will have to stomach IRS collection efforts, including potentially notices of federal tax liens, notices of intent to levy, and the corresponding emotional stress. But, if an employer cannot pay the amount at issue and there is a valid ERC claim that has not yet been paid by the IRS, this may be the only option.

If you are considering an ERC refund lawsuit or any other ERC-related matter, please feel free to contact me at jglassman@meadowscollier.com or 214-749-2417. Please also feel free to contact me about any other civil or criminal tax matter.