The IRS may have to pay COVID-related refunds to thousands of businesses, but companies will need to act quickly to claim them, tax experts said.
The Employee Retention Credit (ERC), introduced in March 2020, provided a refundable credit to eligible employers who paid some or all employees even if their business was suspended by government order or experienced a significant decline in receipts. As the pandemic evolved and expanded in the years that followed, so did the ERC. Constant changes and slow IRS guidance led to widespread confusion and, ultimately, abuse that forced the IRS to extend the moratorium on claims from September 14, 2023, to August 8, 2024.
During the summer of 2024, the IRS also rejected 28,000 claims based on the possibility of fraud rather than actual investigation, so many may have been improperly rejected, Independent National Taxpayer Advocate Erin Collins said in a blog. Taxpayers who filed appeals may still be waiting for a reply, but they should not sit idle. There is a strict two-year statute of limitations that began when the IRS first rejected your claim to recover your refund that is now about to expire.
“If the deadline is missed, the consequences will be severe: The taxpayer loses the right to file a lawsuit in federal court, and the IRS is barred from issuing a refund, even if the claim is otherwise valid,” Collins said.
ERC refunds are another tax issue left over from the COVID era. Individual taxpayers are also racing to secure potential IRS refunds by July 10 after a federal court ruled that the 2019, 2020, 2021 and 2022 tax filing deadlines were suspended until mid-2023 because of the pandemic. Without the taxes, people who were fined or charged fees during those years could be eligible for a refund, lawyers said.
How much ERC money is at stake?
Upon launch, eligible businesses can claim 50% of eligible wages paid during the pandemic from March 13, 2020, to December 31, 2020, up to a maximum of $5,000 per employee.
Congress extended the ERC in 2021. It also increased the maximum credit amount to $7,000 per employee per quarter through September 30, 2021 for most employers. It also began allowing companies that had taken loans from the Paycheck Protection Program (PPP) to participate. The PPP was another COVID-era program aimed at helping businesses continue paying workers.
Can taxpayers save their refund claim?
The IRS provides the ERC lifeline to a narrow group of taxpayers.
The IRS said those who have six months or less left until the two-year deadline expires and are waiting for the IRS to consider an appeal related only to a Letter 105-C or 106-C denying an ERC refund claim can use a “streamlined” process to request an extension. If the extension is approved, the IRS will sign and return the agreement to you.
“Rejections unrelated to ERC letter 105C or 106C, or claims that are more than six months outstanding, should go through the normal IRS channels,” said Peter Haukebo, partner at Frost Law.
This is important for the many other taxpayers who have rejected IRS claims, Collins said. In 2025, he said, the IRS will issue about 720,000 denials, of which ERC notices were only a small fraction. All of them face a two-year deadline.
The IRS plans to send Notice CP320B to taxpayers who are eligible for the streamlined extension process, but Collins said taxpayers should “monitor the statute of limitations based on the date of the claim denial notice, as the IRS does not display this deadline on notices or on transcripts.”
What is the ‘streamlined’ process for securing ERC refund claims?
To protect the right for eligible taxpayers to claim their refund, they must submit Form 907 requesting an extension through the IRS Document Upload tool by visiting IRS.gov/DUTReply and selecting Notice ‘CP320B’ from the drop-down menu. Taxpayers will be notified in writing if the IRS agrees to an extension. The extension must be agreed to by both the taxpayer and the IRS.
“Simply submitting a Form 907 signed by the taxpayer does not protect you unless the IRS also processes the form,” Haukebo said. “The agreement does not take effect until an authorized IRS official signs on behalf of the Commissioner.”
If the deadline passes before the IRS signs off — for any reason, including the IRS processing backlog — the taxpayer is out of luck, he said. And if for some reason the refund check arrives later, it is legally considered “bad” and can be returned.
“It’s also worth noting that the IRS announcement is silent on a larger issue: The Service is not required to agree to any extensions, and the agency is not required to grant the full period to taxpayer requests,” Haukebo said. “The extension granted by the IRS is a courtesy, not a taxpayer right.”
What happens if the deadline is near and the IRS does not agree to an extension?
If the case goes down to the wire and there is no communication from the IRS, tax experts recommend:
- If your case is on appeal, contact that department and find out if an appeals officer has been appointed and work with that person to finalize the agreement. “Documentation, follow-up and consistent communication matters,” Haukebo said.
- Contact the Taxpayer Advocate Service (TAS), which is headed by Collins. “TAS exists precisely to address situations where IRS processing delays jeopardize taxpayers’ rights,” Haukebo said. “A statute ending on Form 907, which the IRS has not yet signed off on, is exactly the kind of issue TAS would take seriously.”
- File a lawsuit as a last resort. “Filing a refund lawsuit before the deadline preserves the taxpayer’s right to recover the refund. But this step has a real cost,” Haukebo said. Not only may you have to pay an attorney and court costs, he said, but authority over refunds moves from the IRS to the Justice Department and new limitations may arise.
“This new streamlined process for ERC claims is a step in the right direction toward protecting taxpayers’ rights, but it highlights a broader issue,” Collins said. This IRS process “needs to be expanded to all rejection cases. Until the processes for all claim rejections are fully aligned, taxpayers should remain cautious. The statutory clock keeps running, and waiting could mean losing a refund entirely.”
Medora Lee is the money, markets and personal finance reporter at USA TODAY.