How Long Does the IRS Have to Challenge an ERC Refund?

For employers who have either filed for or have received payment for Employee Retention Credit (ERC) claims, the significant surge in IRS examinations of ERC claims is similar to the shark in the movie Jaws. You know he is out there, but you don’t know where he will bite and when. HERE is the Jaws theme music to put you in the right mood. I have been getting a number of questions from employers who received ERC payments about when it is safe to go back in the water, i.e. when can the IRS no longer bite them. First and foremost, it is important that employers understand that payment of an ERC claim does not mean the IRS agrees that the employer is entitled to the payment. Only after all the applicable statute of limitations have expired will an employer know that the IRS will not challenge the ERC claim.

The general three-year statute of limitations under IRC Section 6501 is applicable to FICA taxes (Social Security, Medicare and additional Medicare taxes) and federal income tax withholding reported on a Form 941 and or amended Forms 941 with ERC claims. However, pursuant to IRC Sections 6501(b)(2) and 6513(c), the statute of limitations for employment taxes does not begin until April 15th of the following calendar year. For example, the three-year statute of limitations for all four 2019 Forms 941, did not start until April 15, 2020 and the IRS had until April 15, 2023 to propose changes to any of the 2019 Forms 941.

Although the filing of an amended Form 941 does not extend the three-year statute of limitations, there is a special statute of limitations for the third quarter of 2021. For that tax period, the statute of limitations does not expire until April 15, 2027, which likely reflects the growing concerns with ERC claims. The Treasury Department's 2024 Greenbook includes a proposal to extend this special five-year statute of limitations to all periods for which the ERC could be claimed.

Under IRC Section 7405(b), the government has another option to recover an erroneous ERC payment, i.e. filing a civil action in federal court within two years of the refund being paid. In order to prevail, the government must prove that (1) a refund was made to a taxpayer, (2) the refund was erroneously issued, and (3) the lawsuit was filed timely. Even if the Section 6501 three-year statute of limitations expires, the government can file a civil action for an erroneous refund within two years of payment. The Section 7405 two-year period is extended to five years if the refund was obtained by fraud or misrepresentation.

Only after all relevant statute of limitations have expired should employers feel free to go back in the water. Otherwise, "you're gonna need a bigger boat" .

If you have any questions on this or any other tax issues, please feel free to contact me at jcrouch@meadowscollier.com.