Many employers who filed employee retention tax credit (ERTC) refund claims have been waiting months or even years to receive refund checks. The IRS stopped processing refund claims in mid‑July of 2023 and publicly announced a moratorium on processing new claims on September 14, 2023. Although the IRS's stated reason for the moratorium was an increase in invalid ERTC refund claims, the moratorium has created a significant delay for employers with valid claims whose eligibility for the ERTC is not in doubt. Some of these employers might consider filing a refund suit to expedite payment of their ERC claims.
Eligibility to File a Refund Suit
An employer who has filed a refund claim and has not received a refund check or a notice of disallowance from the IRS within six months of the filing date may file a refund lawsuit. Nearly every employer with a pending refund claim has been waiting at least six months for the IRS to process the claim or, based on current processing timelines, will wait at least six months.
Litigation Strategy
Venue for Filing Suit. A refund suit can be filed in the U.S. district court where the employer has its principal place of business or in the Court of Federal Claims. In either venue, the government is generally represented by attorneys from the U.S. Department of Justice Tax Division. Filing a claim in the Court of Federal Claims may have certain advantages. First, it eliminates the need to find local counsel in the district court where the employer is located, which could be valuable if the employer is not familiar with local tax litigation attorneys. Second, in the Court of Federal Claims, the clerk of the court serves copies of the complaint on the U.S. Attorney General. The litigant does not need to incur the time and expense of serving process on the appropriate U.S. attorney and the Attorney General. Third, because the Court of Federal Claims is concerned exclusively with claims against the United States, litigation procedures and timelines might be more streamlined in the Court of Federal Claims compared with the district courts, which hear both civil and criminal cases of all sorts.
Documenting Eligibility in Refund Suit. Many employers with pending refund claims are certain of their eligibility for the ERTC and the amount of their refund claims, like employers who qualify under the gross receipts decline test, or employers whose operations were clearly suspended by government orders. The objective of filing an ERTC refund lawsuit is to expedite approval and processing of the employer's refund check without protracted litigation. Thus, employers generally should not file a proactive ERTC refund lawsuit unless they have first analyzed the law and documented the facts establishing their eligibility for the ERTC and the amount of the refund claim. Employers should include in the refund complaint the information and documents establishing their eligibility for the ERTC and the amount of the refund claim. Setting forth this information in the refund complaint enhances the employer's ability to resolve the refund claim by stipulation or settlement, without extensive discovery or contested motions.
Recovering Attorneys' Fees and Costs. Recovering attorneys' fees and costs from the IRS is rare. The general rules do not permit a litigant to recover attorneys' fees in a lawsuit against the IRS if the government's position in the litigation was "substantially justified." The "qualified offer" procedures in Section 7430(g) of the Internal Revenue Code permit a party to make a settlement offer to the IRS (including an offer to settle a refund claim for its full amount). If the IRS does not accept the offer and the party later prevails, a portion of the attorneys' fees and costs incurred after the settlement offer was made may be recoverable, regardless of whether the IRS's position was justified. Making a qualified settlement offer to the IRS is a tool to consider in expediting a refund lawsuit. Pursuant to the settlement procedures of the U.S. Department of Justice Tax Division, a settlement offer will have to be reviewed by the trial attorney, and at least one other attorney in the Department of Justice Tax Division.
The IRS's moratorium on processing refund claims has led to significant delays for employers that are certainly eligible for the ERTC. The moratorium has also resulted in significant accrual of interest on refund checks. Employers that have carefully reviewed and documented their eligibility for the ERTC and do not wish to continue waiting for the IRS to resume processing ERTC refunds might consider filing refund lawsuits.
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