We are deep in the messy stages of the Employee Retention Credit. If you represent clients who claimed the ERC, you are frustrated. The IRS stops processing without warning. The agency says they are done. The reality on the ground says otherwise.
According to a
Many of us in the tax practitioner community read that and shook our heads. We represent hundreds of clients with ERC claims. We know of many claims that have seen zero action. The IRS has not audited them. It has not disallowed them. It has not issued refunds. These claims just sit there in a state of administrative suspense. This was vital COVID relief. Many businesses are still waiting for money they factored into their survival.
The GAO recommended the IRS update the public on the actual status of these claims. The agency simply repeated that it closed all non-examined claims at the end of 2025. This leaves us with a disconnect. The IRS says the queue is clear. Our experience says otherwise.
The confusion over pending claims is bad. The situation for disallowed claims is much worse. It is a trap for unprepared taxpayers and their representatives.
By August 2024, the IRS had denied approximately 28,000 ERC claims. If your client received a Letter 105-C disallowing their claim, you know the drill. You protest the disallowance to the IRS Independent Office of Appeals. That is usually the right move if you track the deadline.
Unlike the Exam team, Appeals has the authority to settle cases based on the hazards of litigation. Eligibility for the ERC is highly subjective. This is especially true regarding partial suspension due to government orders. A restaurant that had to space out tables faced a partial suspension. A professional services firm subject to a vague capacity order that arguably limited its operations sits in a gray area. Reasonable people disagree on these facts. IRS Appeals is where you negotiate those disagreements.
But Appeals is overwhelmed. It lost significant personnel over the last year. Protesting a disallowance will likely take more than a year. It could easily take two years to get a hearing.
This is where the trap snaps shut. Under IRC Section 6532(a)(1), taxpayers must sue for a refund within two years of the IRS mailing the notice of disallowance. Protesting to Appeals does not pause this clock. It does not extend the deadline. The clock keeps ticking while your file sits on a desk in Appeals.
You have two options to stop the clock. You can file a lawsuit in federal court. Or you can get the IRS to execute Form 907, an agreement that extends the period of limitations on filing suit. Both parties must sign. The IRS must agree. These options are not mutually exclusive. A practitioner can file suit and simultaneously pursue settlement.
Getting the IRS to sign Form 907 should be a simple administrative task. It is not.
National Taxpayer Advocate Eri Collins released her
The Advocate reported that the IRS denied 316 ERC claims simply because the two-year period expired. The taxpayers were waiting on Appeals. The clock ran out. The IRS denied the claims regardless of their actual eligibility for the credit.
Those 316 claims are just the beginning. The IRS reported approximately 28,000 denials by August 2024. Those two-year clocks are running out now. If the IRS does not fix the Form 907 process immediately, thousands of legitimate businesses will lose their right to a refund. They will lose it not on the merits, but on a procedural technicality caused by IRS delays.
This is a fundamental violation of taxpayer rights. The National Taxpayer Advocate report stresses the right to a fair and just tax system. Forcing a taxpayer to forfeit a claim because the agency cannot process an appeal in two years is neither fair nor just.
Appeals cannot do its job if it does not have the staff. The attrition rate over the last year has gutted its ranks. It is prioritizing cases with imminent statutory deadlines, but is still falling behind. This is why the Form 907 extension is not just a technicality. It is the only lifeline keeping these claims alive long enough for a human being to review them.
Mary Lundstedt, a founding partner at Hall Lundstedt who has handled hundreds of ERC cases, warns that many clients reaching Appeals are quickly sent back to Exams. "Appeals is meant to review the existing record, not develop new facts. When taxpayers present new data to substantiate the impact of government orders, Appeals often deems it 'new information' and returns the case to Exams. This ping-pong effect drags out ERC cases and frustrates business owners who thought Appeals was their chance to fully make their case."
We cannot rely on the IRS to fix this in time. You need to adjust your workflow and strategy based on the current status of each claim.
First, look at your pending claims. These are the claims the IRS says are closed but have no actual resolution. Do not assume they are dead. Contact the Taxpayer Advocate Service. Contact your client's congressional representative. Provide tracking numbers and filing dates.
If you have already done that, wait before rushing to court. The IRS may be signaling a forthcoming surge of payments. Give it a few months if time allows. If nothing happens, filing suit is your client's only recourse.
There is an important caveat. The IRS has historically taken the position that taxpayers retain the right to sue for as long as the refund claim remains pending without IRS action. That is the IRS's historical position. It is not guaranteed. A handful of courts have disagreed, holding that a general six-year statute of limitations applies, running from six months after the refund claim is filed. That 6.5-year outer limit is starting to come up for ERC claims filed in 2020. If you are approaching that window, waiting is no longer an option.
Second, look at your claims currently under audit. Use the examination as an opportunity to build an overwhelming case. Answer every question the IRS asks. Then answer the questions it should have asked. Provide comprehensive documentation. Include the specific government orders. Include the financial impact analysis. Do not hold back arguments for Appeals. Try to win it at Exams.
Third, audit your disallowed claims. Pull every file where you filed a protest with Appeals. Check the date in the Letter 105-C. Calculate the exact date the two-year statute of limitations expires. Put it on your calendar in red ink.
Do not wait for Appeals to contact you. In my view, if you are within six months of the two-year deadline, you cannot wait. Request the IRS to execute Form 907 immediately. Send the request via certified mail. Document everything.
If the IRS ignores you or refuses to sign, you have a difficult conversation ahead. Your client must file a lawsuit in federal court to preserve their claim.
Litigation is expensive. It requires legal counsel. Many small businesses cannot afford to sue the federal government over a $50,000 credit. The IRS knows this. But if the alternative is losing the claim entirely because the clock ran out, litigation is the only choice left on the table.
Prepare your clients for this reality now. Do not wait until month 23 to tell them they need to hire a litigator. Give them time to weigh the costs and benefits.
The IRS is trying to close the books on the ERC era. Whether by design or administrative failure, the result is the same. The lack of a functional Form 907 process is a glaring failure of tax administration. It punishes taxpayers for the agency's own backlog.
Our job is to guide our clients through this mess. We must track deadlines with precision. We cannot let our clients fall into the two-year trap.
File the Form 907 request. Track the deadline. If the IRS will not cooperate, there is little choice but to file the lawsuit.
The IRS may have closed its books on these claims. Our work is far from over.
