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Congress enacted the Employee Retention Credit (ERC) to reimburse businesses for retaining employees during the COVID pandemic, allowing employers to retain millions of employees during a time of great uncertainty and serious economic challenges. The hope was that the IRS would quickly and efficiently process ERC refunds that were critical to many employers’ ability to weather those challenges. (I was part of IRS leadership when it first began processing ERC refunds.) However, for many businesses, the entire ERC process has been anything but quick or efficient.
At first, the IRS processed ERC claims rather quickly. Over time, however, ERC processing went from quick and efficient, to suspended indefinitely. Administrative resources intended to be used to analyze, review and pay eligible claims were shifted to blanket “rubber stamp” denials of a mass volume of claims, without any meaningful review. The story got better, for a while, when in December of 2024 then IRS Commissioner Danny Werfel publicly said that the IRS would complete processing of ERC claims in 2025, and that most claimants would receive refunds. We do not know exactly how many claims the IRS has processed since then, but one organization has estimated there were about 297,000 claims left to be processed at the beginning of July of 2025, suggesting that the agency had processed almost one million out of the 1.2 million claims that the IRS reported having in its inventory as of October 2024.
The environment has changed significantly over the last several months. Anecdotally, ERC refunds seem to have slowed to a trickle, and the IRS has started to audit (Letter 6612) and deny (Letter 105c) more of the remaining claims.
I have previously written about what to do if the IRS denies your ERC refund claim here and here. One option is to protest the denial with the IRS Independent Office of Appeals (the IOA). Unfortunately, things have changed since I wrote those articles. The IOA has lost approximately 28% of its work force (down to a total staff of approximately 1,275 employees as of June 2025), and businesses protesting claim denials must wait a very long time to get a hearing. (Businesses that wish to preserve their right to sue the IRS for their refunds should know that you must sue within two years from when your refund was denied unless the IRS agrees to extend that period.) While few businesses whose ERC refund claims were denied have received an IOA administrative hearing so far, early indications are that the IOA has not been favorably disposed toward ERC claims. Still, there is not much downside in going to the IOA if you can afford to wait. In fact, that may be your only hope if the amount of your ERC claim does not support the costs of refund litigation.
The other option is to sue the IRS in federal court. Readers may recall that early in 2023 the IRS suspended all processing of ERC claims under what it called a “moratorium.” Some frustrated businesses got tired of waiting and sued the IRS. The number of lawsuits being filed slowed down, however, once Commissioner Werfel said that the IRS would start processing claims back in December. After all, why sue if there is a high likelihood of the IRS granting your claim?
Yet, now that the IRS appears to be denying more claims, we are seeing more businesses interested in litigating to get their refunds. I’ve previously written about what employers considering suing the IRS should consider here. Since I wrote that article I’ve filed several suits on behalf of businesses seeking their ERC refunds. Department of Justice (DOJ) lawyers assigned to defend those cases are very capable, and they will work to make sure that the taxpayer is eligible for the credit and that it is correctly computed. Where that can be easily established, DOJ lawyers will do their best to ensure that businesses receive their ERC as quickly as possible. Litigation costs can be significantly reduced if the business can provide the DOJ with everything needed to demonstrate their eligibility for the ERC as soon as the DOJ lawyer enters an appearance.
In some cases, eligibility for the credit may be uncertain. For example, most businesses claimed they were eligible for the ERC because a government order partially suspended their operations. Whether a business was partially suspended is not always clear. Lawyers call that uncertainty “litigation risk” or a “hazard.” A non-lawyer might think of it as the relative chance of losing. Businesses’ whose ERC claims have some uncertainty – whether because of a partial suspension issue or other reasons – should consider these hazards when deciding whether to settle or litigate. Of course, nobody should give a strong case away but if there is an inherent uncertainty a quick resolution can save litigation costs. Indeed, DOJ, like the IRS, has lost a significant part of its workforce in recent months, leaving it with fewer lawyers to litigate any case it does not settle. That does not mean that DOJ will settle for more than a case is worth, but resource constraints should make DOJ more amenable to settlement discussions in most cases.
Finally, many taxpayers still waiting on their refunds used a PEO to file the claim. PEO cases present special challenges. First, many taxpayers struggle to get information about their ERC claims. The IRS will usually only speak with the PEO during the audit phase, and not the taxpayer whose underlying claim is at issue. Second, PEO cases also raise questions about who should sue– the employer or the PEO? Or both? Still, businesses that used a PEO should not be expected to wait forever to get their refunds. Third, the IRS has determined that PEOs are, with the employers, jointly liable for improperly claimed ERCs, which can make PEOs hesitant to pay out even clear cut claims.
The author would like thank Charles “Chuck” Rettig and John Hackney for their helpful comments on this article. Both are lawyers who specialize in representing taxpayers in tax controversies. Mr. Rettig was Commissioner of the IRS from 2018 to 2022.