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The IRS is struggling with backlogs in processing employee retention tax credits, leading to a surge in lawsuits.
Small businesses still awaiting their pandemic-era employee retention credits may have a new way to speed up the process.
A specific tax code provision permits taxpayers to sue the IRS if they haven’t received a response to their refund claim within six months or if their claim was denied and they believe it is valid.
“Many small businesses are now pondering whether to keep waiting for the IRS or, given that six months have passed since filing their claim, proceed with a refund lawsuit,” explains Brian Bernhardt, a partner at Fox Rothschild specializing in federal tax issues.
Authorized by the CARES Act, the employee retention credit aimed to encourage employers to retain staff during the pandemic’s high unemployment rates.
However, the IRS has struggled to handle the influx of claims, both from genuine businesses and fraudulent entities. Last September, the agency stopped processing new ERC claims due to widespread fraud. By April, the IRS had reclaimed hundreds of millions in erroneously claimed ERCs. Consequently, tax advisory firms and businesses have started suing the IRS, though victories are rare due to slow litigation processes.
The IRS has increased its ERC claim processing time to 180 days, up from 90 days. This period could extend further if there are questions regarding a claim.
As of March, over one million ERC claims remained unprocessed by the IRS.
These delays affect not only the companies seeking the credits but also tax advisory firms assisting businesses with the paperwork in hopes of receiving a share of the credits as payment.
Jonathan Cardella, who runs Strike Tax, a tax advisory firm in Boise, Idaho, has experienced this firsthand. His firm, which initially specialized in R&D tax credits, saw a significant increase in interest from businesses seeking the employee retention tax credit. Within a year, ERCs became a major part of his business.
Cardella claims his firm has missed out on $5 million in anticipated revenue due to uncollected fees, as businesses he advised have yet to receive their credits. Consequently, he has had to lay off 20 staff members. Although Cardella cannot sue the IRS directly, he is exploring legal action.
“We’re still hoping the IRS will do the right thing, but we’re in a bit of limbo as we work to develop our first handful of plaintiffs,” Cardella says. “Once I find a client willing to take the plunge, we’ll file our first case.”
