ERC Litigation: The Time to Line Up Litigation Counsel is Now

From the time the IRS disallows a taxpayer’s refund claim, the taxpayer has only two years to file a lawsuit in federal court. Similarly, the IRS has only two years to pay a refund after a disallowance. Accordingly, many taxpayers whose refund claims were disallowed more than one year ago should evaluate as soon as possible whether they may need to file lawsuits.

This need to file lawsuits is especially pronounced with respect to employee retention credit (ERC) issues. In 2024, the IRS sent several large waves of claim disallowances. The two-year period for those disallowances will therefore expire in the coming months. While there are ways to obtain extensions to file lawsuits (and to give the IRS more time to process refunds) the extension procedures have been largely slow and unreliable.

For taxpayers whose refund claim disallowances are pending with the IRS Independent Office of Appeals (“Appeals”), taxpayers need to be extra focused on the two-year period expiration.

This hypothetical may paint the picture: A taxpayer’s ERC refund claim was denied on August 1, 2024. The taxpayer is still working with Appeals to resolve the issue. On July 15, 2026, the taxpayer and Appeals reach resolution on the underlying issues. Appeals then sends the case to the department at the IRS that processes refunds. However, if the case file is not opened by that department until August 15, 2026, the IRS may be legally barred from issuing a refund.

It is expected that many taxpayers will be in similar situations in the coming months. For taxpayers who may have similar issues, the time to consult with competent legal counsel is now. Legal counsel will likely need time to evaluate the underlying issues and prepare the necessary court filings. Or alternatively, legal counsel can evaluate the claims and determine that litigation may not be the best course of action. But again, all of these processes take time.

If you have any questions about this article, ERC issues, or any civil or criminal tax issue, please contact me at jglassman@meadowscollier.com or 214-749-2417.