If you claimed the Employee Retention Credit (ERC) but have not received it, you may need to file a refund suit against the IRS. You have a limited amount of time to make a claim — If you have received a 105-C disallowance notice, you have two years from the deadline on the notice to file suit.
However, you don’t need to receive this letter to file a lawsuit. If the IRS is taking too long to process your claim, you can also sue for a refund as long as it has been at least six months since you filed the 941-X with the ERC.
Note that if the IRS has sent you Notice 6612 about an audit on your ERC claim, you do not need to worry about filing a refund claim during the audit. However, if the auditor disallows your credit, you may need to appeal, and depending on the appeal results, you may need to file a refund suit at that time.
Filing a refund suit is a complicated legal process. To protect yourself, you should work with a tax attorney experienced with refund litigation. Contact Wiggam Law today for help.
IRS Notice 105-C and Refund Claims
If the IRS disallows your ERC, they will send you Notice 105-C. This notice explains why the credit was disallowed and your appeal rights. It also notes that you have just two years from the notice date to request a refund by filing a legal suit against the IRS.
The two-year deadline is extremely important. If the IRS doesn’t issue your refund in this time frame, you can only get a refund by filing a refund suit. But generally, you don’t need to file a suit right away. Instead, you can dispute the disallowed credit by responding to the notice or filing an appeal.
Steps to Take If You Disagree with the Disallowance
When you receive Notice 105-C, review it carefully to figure out what the IRS has disallowed your ERC claim. Then, review the ERC eligibility criteria or talk with an ERC attorney to see if your claim is likely to be valid. If you still disagree with the IRS’ decision, gather information that supports your claim and send it to the IRS within 30 days of receiving the notice.
You need to include proof that you qualified to claim the credit – for example, sales records showing a decline in revenue or government orders that affected your ability to operate normally. You also need details about the wages, such as whether or not relatives received them and if they were paid to employees who were working or not. On top of that, you will need to show that the wages were not paid by a Paycheck Protection Program (PPP) loan or another type of COVID relief.
When you send in your response, you may also want to note that you would like to request an appeal. Then, if the IRS disagrees with the information you have provided, they can immediately send the case to appeals.
Even if you are going to appeal, keep an eye on the time. The appeal does not give you any extra time to file a refund suit. You still only have two years from the date on the notice, regardless of where you are at in the appeal process.
The Two-Year Timeline for Filing a Refund Suit
The tax code gives you two years to file a suit for the disallowed tax credit. The timeline starts on the date noted on the 105-C notice, and if you don’t file a suit during this time, you will lose your tax refund. At that point, the IRS can no longer issue the refund.
Be aware that filing an appeal does not extend the two-year deadline. The only way to extend the deadline is to file Form 907 (Agreement to Extend the Time to Bring Suit). On this form, you will note the new expiration date to file suit, and you must also note the following information about the refund:
- End of the tax period for the disallowed ERC claim.
- Type of tax – payroll tax.
- Amount of tax
- Date the disallowance of ERC was mailed.
This agreement is not final until an IRS employee signs it.
Unless you’ve agreed to extend the two-year timeline, the IRS cannot issue the credit after that time frame. Unfortunately, even if Appeals has approved your disallowed ERC but not issued the refund, you may need to protest in court if it’s getting close to the end of the two-year period.
When and How to File a Refund Suit
You can file suit with the US District Court that has jurisdiction in your area or with the US Court of Federal Claims in the following situations:
- You have received Notice 105-C and want to dispute the disallowed ERC.
- You appealed a disallowed ERC, and the Office of Appeals rejected your request.
- The two-year deadline is about to expire and Appeals has not made a decision.
- The two-year deadline is about to expire. Although the Appeals court has issued a favorable decision, the IRS has not yet issued the refund.
In all cases, you can only file a refund suit if you requested the refund at least six months ago. With ERC claims, this typically means that you must have filed your 941-X return at least six months ago.
Once you file suit, the government has 60 days from the service of the summons or complaint to respond. The IRS will assign a defense attorney to represent their interest in the case, and the attorney will exhaustively review the tax returns, supporting documents, and correspondence that occurred during the audit and after the IRS sent you the disallowance letter. While your case is in litigation, the IRS will freeze your account in relation to the tax periods related to the ERC. The IRS cannot issue refunds or post-credits while your account is frozen.
Although you have the right to represent yourself in court, you should work with a tax attorney. An attorney understands the refund suit process, knows which types of defenses the IRS’ attorneys are likely to bring forward, and understands how the tax code applies to your case. Your attorney can ensure that the courts have the best documents to support your ERC claims, and they can argue that your claim was legitimate.
Working with a Tax Attorney for Refund Suits
If you have been responding to the IRS on your own or if you have been working with a tax professional who has yet to be able to get you the desired results, you should reach out to an experienced attorney. However, because you’re dealing with such a unique tax credit, you need an experienced attorney for both refund lawsuits and employee retention credit.
Keep in mind that litigating issues in Tax Court is not the same as filing a refund suit. To protect your interests, make sure you hire an attorney who is experienced with refund litigation in particular.
An attorney can also help you decide if it’s more advantageous to file a suit in the judicial district court or the Court of Federal Claims, and they can initiate the lawsuit for you. They can advise you on whether or not you should extend the two-year time frame to file suit. If you’ve just received the disallowance letter or are facing an ERC audit, an attorney can also guide you through the audit or dispute process so that you can avoid litigation.
Taking legal action can be costly, and the risk of losing the credit means that even more is at stake. To protect your business’s bottom line, you should invest in the help of an attorney.
What to Expect During the Refund Suit Process
The process starts by filing a suit in the district or federal court. Then, you wait up to 60 days for an answer from the Department of Justice. During that time, your attorney may gather information to support your case and review the correspondence that you sent to the IRS.
Your attorney will attempt to prove to the Department of Justice’s attorney that you are entitled to the credit. If the attorney agrees, you may be able to avoid an extensive discovery process and trial. If not, your lawyer will navigate through the discovery process and ensure that your case is made as effectively as possible.
Depending on the situation, you may get a full recovery of the refund you claimed, a partial recovery of the ERC credit, a settlement, or a denial. If you win, you will also get a refund of any penalties incurred related to the ERC, and you may be able to recover the costs you paid to your attorney during the process, but there are a few limitations.
For example, if the IRS’ argument was justified, you may not be able to recoup costs. However, in all cases, hiring an attorney is an investment into preserving your ER claim.
Alternatives to Filing a Refund Suit
Unfortunately, a lot of taxpayers, especially small businesses, are being forced to file a refund suit due to the IRS’ delays in processing ERC claims. If you are close to the two-year time limit, you should talk with an attorney about filing suit. However, if you’re not close to the deadline, consider the following first:
- Write a letter disputing the disallowed claim within 30 days of receiving Notice 105-C.
- Appeal the disallowance through the IRS Independent Office of Appeals.
Regardless of your decision, be ready to back up your claims with documentation. You need to prove that you were eligible for the credit, that you claimed it on eligible wages, and that you calculated it correctly.
You have a limited amount of time to deal with a disallowed ERC claim, and even if you have not received a disallowance, you may need to file suit if the IRS has not processed your 941-X.
On the other hand, if you claimed the credit erroneously, you may need to withdraw your claim. We can help you do a risk assessment if you’re worried about the legitimacy of your ERC—the IRS has been warning taxpayers about ERC risks for over two years.
If you already received the credit, you may qualify for the IRS’s Voluntary Disclosure Program in relation to the 2021 ERC. Still, you can only qualify for this limited-time option if the IRS has yet to contact you about an audit and you meet other criteria.
Contact Us for Legal Help
The team at Wiggam Law has experience helping clients with ERC claims and refund suits. To get legal assistance and guidance, contact us today. Call us at (404) 233-9800 or fill out our online consultation form to schedule a meeting.