Court ruling could result in millions of dollars in IRS coronavirus tax refunds
A federal court ruling has brought back the issue of COVID-19-era taxes and could leave some Americans owed refunds.
The IRS may have to pay coronavirus-related refunds to tens of 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 of their employees despite a government order that shut down their operations or caused a significant reduction in income. As the pandemic developed and spread into later years, the ERC responded as well. Constant changes and slow IRS guidance led to widespread confusion and ultimately abuse, forcing the IRS to suspend claims from September 14, 2023 to August 8, 2024.
In the summer of 2024, the IRS also denied 28,000 claims based on potential fraud rather than an actual investigation, many of which may have been unfairly denied, independent tax advocate Erin Collins said in a blog post. Taxpayers who have filed an appeal may still be waiting for a response, but they should not sit idly by. There is a strict two-year limit that begins when the IRS first denies an overdue refund claim.
“If the deadline is missed, the consequences are severe. Taxpayers lose the right to sue in federal court, and the IRS is prevented from issuing refunds even if their claims are legitimate,” Collins said.
ERC refunds are the second remaining tax issue in the coronavirus era. Individual taxpayers are also scrambling to protect their potential IRS refunds by July 10 after a federal court ruled that the 2019, 2020, 2021 and 2022 tax filing deadlines will be delayed until mid-2023 due to the pandemic. Lawyers say anyone who was charged fines or fees during the year could be eligible for a refund if the taxes were not paid.
How much money is coming from ERC?
Once this begins, eligible businesses will be able to 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.
In 2021, Congress strengthened the ERC. Increased credit limit to $7,000 per employee per quarter through September 30, 2021 for most employers. It also began allowing businesses that received loans from the Paycheck Protection Program (PPP) to participate. PPP is another coronavirus-era program aimed at helping businesses keep paying their employees.
Can taxpayers save their refund claims?
The IRS provides an ERC lifeline to a limited group of taxpayers.
The IRS said those who have less than six months left on the two-year deadline and are waiting for the IRS to consider an appeal related solely to Letters 105-C or 106-C disallowing ERC refund claims can apply for an extension using a “streamlined” process. If the extension is approved, the IRS will sign the contract and send it back to you.
“ERC disallowances unrelated to Letters 105C or 106C, or claims with more than six months left due, should go through the normal IRS channels,” said Peter Haukebo, partner at Frost Law.
This is important for many other taxpayers who have had their IRS claims rejected, Collins said. She said the IRS issued about 720,000 denials in 2025, but only a small portion of them were notified by the ERC. All of this remains subject to a two-year deadline.
Although the IRS will send Notice CP320B to taxpayers eligible for the streamlined extension process, Collins said, “The IRS does not display this deadline on the notice itself or on the transcript, so taxpayers should monitor the statute of limitations based on the date of the claim denial notice.”
What is ERC’s “streamlined” process for securing refund claims?
To protect their right to claim a refund, eligible taxpayers should visit IRS.gov/DUTReply, select notice “CP320B” from the drop-down menu, and file Form 907 requesting an extension via the IRS Document Upload Tool. Taxpayers will be notified in writing if the IRS agrees to the extension. extension must Both the taxpayer and the IRS must agree.
“Simply filing a taxpayer-signed Form 907 will not protect you unless the IRS takes action on that form,” Haukebo said. “This agreement will not become effective until signed by an authorized IRS official on behalf of the Secretary.”
If the deadline passes before the IRS signs it for any reason, such as an IRS backlog, taxpayers are out of luck, he said. And if, for some reason, your refund check arrives later, it could legally be considered an “error” and your money back.
“It is also notable that the IRS announcement is silent on one major issue: There is no requirement for the IRS to agree to an extension at all, nor is there any requirement for the IRS to grant the full amount of time requested by the taxpayer,” Haukebo said. “The extension the IRS is proposing is a courtesy, not a taxpayer right.”
What happens if the deadline approaches and the IRS doesn’t agree to an extension?
If the issue becomes a problem and you haven’t heard anything from the IRS, tax experts recommend the following:
- If your case involves an appellate division, contact that division to find out if they have an appellate representative assigned and work with them to finalize the contract. “Documentation, follow-up and ongoing communication are key,” Haukebo says.
- Please contact the Taxpayer Service Advocate (TAS), led by Mr. Collins. “TAS exists precisely to address situations in which IRS processing delays threaten taxpayer rights,” Haukebo said. “The expiration of the Form 907 statute, which the IRS has not yet signed, is exactly the type of issue that TAS takes seriously.”
- File a lawsuit as a last resort. “Filing a refund lawsuit before the deadline preserves the taxpayer’s right to recover their refund. However, this measure has real costs,” Haukebo said. Not only will they have to pay attorney fees and court costs, he said, but authority over refunds will shift from the IRS to the Justice Department, potentially creating new restrictions.
“This new streamlined process for ERC claims is a step in the right direction towards protecting taxpayer rights, but it highlights a broader issue,” Collins said. This IRS process “needs to be extended to all denial cases. Until the process is fully adjusted for all claim denials, taxpayers must remain vigilant. The statutory clock continues to tick, and waiting could result in a complete loss of refund.”
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
