Although the employee retention credit (ERC) expired for most taxpayers in the third quarter of 2021, it continues to fuel confusion and controversy. A long-standing administrative moratorium on processing for claims filed after January 31, 2024 remains in place, and refund suits for unpaid ERC claims continue to accumulate. The National Taxpayer Advocate submitted a report to Congress on the ERC, highlighting it as the number one issue that the Internal Revenue Service (IRS) needs to address. 

Background on the ERC Program

For a more detailed discussion of the history and purpose behind the ERC program, see our prior coverage here. Congress established the ERC in the early days of the COVID-19 pandemic and expanded it at the end of 2020 and the beginning of 2021. In a nutshell, the ERC allows employers a refundable tax credit against payroll taxes paid with respect to wages of eligible employers. The employer must either have been experiencing a COVID-19 shutdown order during the relevant quarter or have suffered a diminution in its gross receipts. The vast majority of ERC claims are submitted as refund claims on amended employment tax returns (Form 941-X).

IRS Response to ERC Claims, Fraud Concerns, and the Never-Ending Moratorium

As taxpayers began to make ERC claims, the IRS grew increasingly concerned with fraudulent claims given the nature of the program (i.e., the potential for a large cash payment in excess of employment tax liability) and the long period through which taxpayers could make the claims (i.e., April 15, 2024, for 2020 claims and April 15, 2025, for 2021 claims under IRC § 6513(c)). These concerns caused the IRS to place the ERC at the top of its "dirty dozen" list in 2023, with Commissioner Werfel highlighting the questionable nature of certain ERC claims filed by promoters. Continuing the trend of cracking down on fraudulent claims, in February 2024, the IRS Office of Chief Counsel issued generic legal advice memorandum (GLAM) 2024-001, advising that third party payors (i.e., agents of the taxpayer under IRC § 3504) as well as non-certified professional employer organizations could also be held liable for erroneous ERC payments, as both the third-party payor and the taxpayer themselves would be held liable for the underpayment of tax. 

Of most interest to many taxpayers and practitioners is the moratorium placed on processing ERC claims announced on September 14, 2023, in IR-2023-169. As the IRS explained, the growing number of claims required the IRS to pause processing any new claims submitted after September 14, 2023, to allow the IRS to review the existing submissions for any that are improper, as well as allow taxpayers to voluntarily withdraw fraudulent claims, and to alternatively, enter into a settlement program to proactively resolve disputes for payments already received, but may have been improper. On August 8, 2024, the IRS announced in IR-2024-203 that the agency disallowed approximately 28,000 claims (or approximately $5 billion dollars of ERCs) and identified 50,000 valid (low-risk) claims to be processed. As a result of the ongoing progress, the IRS extended the moratorium to cover claims submitted by January 31, 2024, claiming that the agency would prioritize high- and low-risk cases first. The IRS justified this moratorium by stating that it would allow them time to digitize many of the claims and take a closer look at the existing claims (see IR-2024-198). The January 31 date corresponds to legislation that the House (but not the Senate) passed in 2024 that would have disallowed any claims for the ERC filed after that date (H.R. 7024, Tax Relief for American Families and Workers Act of 2024). The 119th Congress could resurrect that aspect of the bill in new legislation, which could raise up to $80 billion per estimates of the Joint Committee on Taxation.

On October 10, 2024, the IRS announced in IR-2024-263 that it is processing 400,000 claims, representing approximately $10 billion worth of ERCs. The IRS also re-opened the Voluntary Disclosure Program through November 2024, allowing qualified taxpayers to avoid penalties and litigation, and allowed taxpayers to retain 20 percent of the claimed ERC amount through a settlement program (see also Ann. 2024-3, 2024-2 I.R.B. 364 (VDC Phase I)). In addition, the IRS announced a consolidated claim process for third-party payors, whereby the payor can withdraw or resolve ERC disputes for those claims that have not been paid. However, the announcement was unclear as to which dates these ERCs were submitted and whether the moratorium would be lifted. 

On January 8, 2025, the National Taxpayer Advocate released a report to Congress that stated that that IRS processing delays are "resulting in uncertainty" and "harming and frustrating business owners." The report noted that notwithstanding the moratorium, "the IRS still has not processed many claims filed prior to September 14, 2023." According to the report, about 1.2 million ERC claims remained unprocessed as of October 26, 2024, which forces taxpayers to make difficult decisions, including not only filing a potentially expensive refund suit but also whether to amend its income tax return to reflect the ERC refund (which reduces the deduction for wages). The report concludes that for many taxpayers, the ERC has "become a source of confusion and hardship." The report recommended lifting the moratorium, expediting claim processing, enhancing communication, and prioritizing economic hardship cases to remedy the IRS's shortfalls with respect to the ERC. 

Taxpayers Take Action

In light of the moratorium and slow progress in processing ERC claims, many taxpayers have taken to the courts in an effort to force the IRS to make progress on the outstanding claims. To date, over two dozen refund suits have been filed in courts across the country. 

A major development in the ERC world came through a lawsuit filed by Stenson Tamaddon, a tax services company which helped taxpayers file ERC claims, whereby Stenson sought injunctive relief to lift the moratorium and invalidate the IRS's substantive notice guidance (IRS Notice 2021-20) on the shutdown order and gross receipts issues. See Stenson Tamaddon, LLC v. IRS, No. CV-24-01123 (D. Ariz.). On July 30, 2024, the district court issued an order denying the preliminary injunction to lift the moratorium. However, the court determined that although a moratorium was within the IRS's purview, "the moratorium cannot last forever, or else it would be [an impermissible] de-facto cancellation of the program." Even so, the court found that Stenson successfully alleged irreparable harm due to the moratorium and that if the court did lift the moratorium, it would do so for all taxpayers. The court also held that it would continue to hear the case on the merits for the other claims. Stenson subsequently dropped its claims relating to the moratorium and focused its lawsuit on invalidating the substantive guidance issued by the IRS in Notice 2021-20.

On December 6, 2024, Stenson filed a motion for summary judgement, seeking a ruling that Notice 2021-20 is invalid under the Administrative Procedure Act (APA) and, relatedly, for the court to issue an injunction on the IRS enforcement of the Notice. The three arguments advanced by Stenson are that the Notice is procedurally invalid, arbitrary and capricious, and beyond the scope of the enabling statute. On December 17, 2024, Stenson formally withdrew its claims as to the moratorium, limiting the scope of the dispute to the APA only. A similar case was also filed in the District of Arizona by Stenson Tamaddon and ERC Today, ERC Today v. John McInelly, et al., 24-cv-03178 (D. Ariz. Filed Nov. 13 2024), whereby the parties are likewise seeking relief under the APA and injunctive relief to allow taxpayers to pursue resolution through IRS Appeals in the event of a disallowance. 

As the April 15, 2025, filing deadline for 2021 ERC claims draws near against the backdrop of a new administration and a flurry of lawsuits, taxpayers with pending ERC claims should closely monitor IRS guidance published in the next several weeks for information relevant to their claims, and taxpayers with potential ERC claims should carefully review ERC guidelines when deciding whether their claims satisfy the requirements to avoid unnecessary delays.

For more information, please contact:

Andy L. Howlett, ahowlett@milchev.com, 202-626-5821

Omar M. Hussein, ohussein@milchev.com, 202-626-1578

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

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