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The Time For ERC Recipients to Get Comfortable Just Got a Little Longer

By Joel N. Crouch on July 2, 2024
The IRS has been extremely vocal about the number of erroneous and/or fraudulent Employee Retention Credit (ERC) filings and its intent to seek repayment of these improper ERC payments. On June 26th, the 9th Circuit Court of Appeals reversed a district court dismissal of a government suit to recover an erroneous refund which could impact ERC recipients.

Internal Revenue Code Section 7405(b) allows the government to file a lawsuit in Federal District Court to recover an erroneous refund. The government complaint to recover the erroneous refund must be filed "within 2 years after the making of such refund" pursuant to IRC Section 6532(b) or in the case of a fraudulent refund, five years after the refund is made.

In United States v. Jeffrey Page, a clerical error caused the IRS to mail the taxpayer a tax refund check in excess of what it should have been. After the IRS made a demand for the return of the refund, the taxpayer returned a portion of the erroneous refund but not all and the government filed an erroneous refund suit. The taxpayer did not file an answer and the government quickly moved for a default judgment. Rather than granting the default judgment, the court dismissed the complaint as untimely because the two-year statute of limitations began to run when the taxpayer received the refund check.

The government appealed the dismissal to the Ninth Circuit, arguing that its complaint was timely because the two-year statute of limitations for an erroneous refund claim begins to run, not when the refund check is issued, but instead when the refund check clears. In a case of first impression, the Ninth Circuit agreed with the government that the statute of limitations for an erroneous refund claim does not begin until the check clears the Federal Reserve and reversed the district court's dismissal of the government's complaint.

So, how does this impact ERC recipients? In a prior blog post, "How Long Does the IRS Have to Challenge an ERC Refund?", we discussed the various options the government has to recover erroneous ERC payments and the applicable statutes of limitations. The Ninth Circuit, in Page, is telling ERC recipients that the time for being beyond the reach of the government may be longer than they originally anticipated.

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