Employee Retention Credit lawsuits now move on three tracks: taxpayers suing the IRS to force payment of denied or stalled refunds, businesses suing the promoters who prepared their claims, and federal prosecutors pursuing fraud cases against filers and preparers. Rulings issued through 2026, together with a 2025 statute that retroactively cuts off certain claims, have changed what each side can realistically win.
Suing the IRS Over a Denied or Unpaid Refund
Refund suits are the most common form of ERC litigation. Two clocks matter, and they run differently.
If the IRS formally disallows a claim through Letter 105-C or 106-C, the taxpayer has two years from the date on that letter to file suit in a U.S. district court or the U.S. Court of Federal Claims.1IRS. Understanding Letter 105-C Disallowance of the Employee Retention Credit Filing a protest with the IRS Office of Appeals does not pause that clock. That matters because in fiscal year 2025, the average time for cases in the IRS appeals process was 337 days, which can consume most of the two-year window before the taxpayer ever gets to court.2National Taxpayer Advocate. Protect Your Employee Retention Credit Claim
If the IRS simply hasn’t acted, you can file suit six months after submitting the refund claim without waiting for a denial. The outer limit for these “no denial” suits is contested; some courts have suggested the Tucker Act’s six-year statute of limitations applies, meaning taxpayers may need to file within roughly six and a half years of the original claim.3Venable LLP. ERC Refund Lawsuits: Protecting Your Rights
Beginning in spring 2026, the IRS started sending Notice CP320B to taxpayers with six months or less remaining on the two-year deadline. The notice comes with a fillable Form 907, an agreement to extend the time to file suit, that can be submitted electronically.4IRS. IRS Announces New Option for Certain Taxpayers To Request More Time After ERC Claim Disallowance Once both parties sign, extensions are typically valid for up to two additional years and can be renegotiated.2National Taxpayer Advocate. Protect Your Employee Retention Credit Claim
What Refund Suits Have Won and Lost
A handful of 2026 district court decisions now shape how these cases are pleaded and litigated.
In First Source Employee Management, Inc. v. United States, a staffing firm sued in the Northern District of Ohio for approximately $20.2 million in refunds for the first two quarters of 2021.5Bloomberg Tax. Staffing Firm Says IRS Stiffed It on $20 Million Employee Credit On June 11, 2026, Judge Charles Fleming allowed the core refund claim to proceed but dismissed the company’s separate challenge to IRS Notice 2021-20 under the Administrative Procedure Act. The court found that First Source lacked standing for the APA claim because it could not show a real and immediate threat of future injury, and because the refund suit itself already provided an adequate remedy.6Forbes. Employee Retention Credit Refund Suit Survives, but Challenge to IRS Notice Does Not
Plastic Film, LLC v. United States, decided in the Southern District of Mississippi, reached a similar split. One quarter’s refund claim (Q3 2020) went forward, while APA challenges to Notice 2021-20 were dismissed. The court held the notice is an “interpretive rule” exempt from notice-and-comment requirements and that sovereign immunity was not waived because a refund suit provides an adequate remedy. The court also ruled that taxpayers do not need to identify specific government orders at the pleading stage; that factual question can be developed through discovery.7Current Federal Tax Developments. District Court Clarifies Pleading Standards for ERC Refund Suits and Rejects APA Challenges to IRS Guidance That is a meaningful shift; it lowers the front-end burden for surviving a motion to dismiss.
In Tri-State Memorial Hospital v. United States, the Eastern District of Washington denied the government’s motion to dismiss and rejected the IRS’s narrow reading of “partial suspension,” affirming that essential businesses like hospitals can qualify for the credit when government mandates caused more than a nominal disruption to their operations.8Meadows Collier. ERC Update: A Court Reminder That the Government Doesn’t Always Interpret the Law Correctly
Preparers have gone to court on their clients’ behalf as well. In ERC Today LLC v. McInelly, filed in the District of Arizona, the firm argued that the IRS’s prolonged and unconventional review approach failed to provide the individualized consideration the law requires.9ZHF Tax Law. ERC Refund Delays: Should You Sue the IRS?
Notice 2021-20 and the Loper Bright Question
A recurring fight in these cases is the validity of IRS Notice 2021-20, which defined key eligibility terms. The notice says a “partial suspension” must have had “more than a nominal” impact, meaning at least 10% of revenue or hours of service. That numerical threshold does not appear in the CARES Act, which uses only the word “partially.”10Harvard Business Law Journal. ERC Post-Loper Bright Analysis
The Supreme Court’s June 2024 decision in Loper Bright Enterprises v. Raimondo overruled Chevron deference. Courts now exercise independent judgment when interpreting statutes rather than deferring to an agency’s reading. Because Notice 2021-20 was issued without formal notice-and-comment procedures, and because Treasury itself stated in 2019 that sub-regulatory guidance “is not intended to affect taxpayer rights or obligations independent from underlying statutes,” taxpayers have argued the notice should get no judicial deference at all.11Bloomberg Tax. IRS Policy, Chevron Ruling May Prove ERC Claims Unsustainable
Standalone APA challenges to the notice have failed so far, as First Source and Plastic Film show. But the merits fight over what “partial suspension” actually means is very much alive within the refund suits themselves, and Tri-State Memorial Hospital is an early sign that the IRS’s narrow reading is vulnerable when a court gets to the substance.8Meadows Collier. ERC Update: A Court Reminder That the Government Doesn’t Always Interpret the Law Correctly
Suing the ERC Promoter Who Prepared the Claim
Businesses that hired third-party firms to file ERC claims and later ran into trouble have brought their own suits, typically alleging fraud, misrepresentation, and breach of contract. ERC Specialists LLC has been a frequent defendant.
In Yayas Kitchen LLC v. ERC Specialists LLC, filed in the District of Nevada in September 2023, the client alleged the firm made false statements about its expertise, claimed it had no special ability to obtain the credit beyond an ordinary preparer, and used a referral agent who misled the client about expediting payments. In Nurturing Direct Homecare Inc. v. ERC Specialists LLC, filed in the Eastern District of New York, the client alleged that a company consultant forged an owner’s signature on the contract and sought to void a fee of roughly $540,000.12Tax Notes. Lawsuits Target Business Practices of ERC Firms
Winning these suits has been harder than filing them. In Greenway Equipment Sales v. ERC Specialists, LLC, dismissed in October 2025 by a federal court in Utah, the judge found the plaintiff lacked standing because it could not show an injury. Greenway, a John Deere wholesaler, had received $729,657 in ERC funds and voluntarily repaid 80% through the IRS’s amnesty program. After paying the provider’s fee, the company still retained about $73,000. With no IRS penalties assessed and no audit opened, the court concluded Greenway was “net positive through this process” and had suffered no cognizable harm.13Forbes. Judge Dismisses Case Against Employee Retention Credit Provider, Finding No Harm If you cleared the IRS amnesty process with money left in your pocket, suing the preparer who put you there may be a difficult case to sustain.
Criminal Prosecution and Preparer Penalties
The Department of Justice has treated ERC fraud as a top enforcement priority through a dedicated Fraud Strike Force. By February 2025, the government had initiated 2,039 tax and money laundering cases related to the credit, obtained indictments against 1,028 individuals, and sentenced 569 people to an average of 31 months in federal prison.14Tax Formulations. Navigating ERC Claims
The largest case so far was announced on January 22, 2025. A federal grand jury in the Eastern District of New York indicted seven individuals — Keith Williams, Jamari Lewis, Morais Dicks, Janine Davis, Tiffany Williams, James Hames Jr., and Ewendra Mathurin — for their alleged roles in filing more than 8,000 fraudulent refund claims for ERCs and Sick and Family Leave Credits totaling over $600 million.15Bloomberg Tax. Seven Charged in $600 Million Fraudulent COVID Tax Credit Scheme Prosecutors alleged the defendants submitted claims for ineligible businesses, misrepresented wages, inflated employee counts, and used virtual private networks to conceal their identities as preparers.16Tax Controversy 360. DOJ Announces Largest Employee Retention Credit Fraud Indictment
On the civil side, the IRS uses Section 6700 of the Internal Revenue Code to impose penalties on people it classifies as “promoters” of abusive tax shelters. These penalties can reach 50% of the gross income derived from the activity, and the IRS assesses them regardless of a promoter’s current ability to pay.17IRS. IRM 5.20.8 – Promoter Investigations
Constitutional challenges are emerging. In HDH Group v. United States, a Pennsylvania district court considered whether Section 6700 penalties trigger a Seventh Amendment jury trial right after the Supreme Court’s 2024 decision in SEC v. Jarkesy. The court ruled that the right applies but is satisfied by the existing procedure allowing the penalized party to pay 15% and pursue a de novo trial in district court, rather than requiring a pre-assessment jury proceeding.18US Tax Disputes. Juries, Penalties, and Timing: Post-Jarkesy Fault Lines of IRS Assessments Commentators have separately argued that Section 6700 penalties may violate the Eighth Amendment’s Excessive Fines Clause when imposed without evidence that the promoter’s clients actually misused the credit or caused harm to the government.19Holland & Knight. When Do ERC Promoter Penalties Become Unconstitutional
The One Big Beautiful Bill Act Cutoff
The One Big Beautiful Bill Act, signed into law on July 4, 2025, reshaped the field for pending 2021 claims. Section 70605 retroactively bars the IRS from allowing or refunding any ERC claims for the third and fourth quarters of 2021 that were filed after January 31, 2024.20IRS. IRS FAQs: Employee Retention Credits Under ERC Compliance Provisions of the One Big Beautiful Bill The IRS can automatically deny pending claims caught by the cutoff and may pursue erroneous refund procedures for claims already paid after that date. The law also extended the IRS’s audit window for those quarters to as late as January 31, 2030.21Fox Rothschild. The One Big Beautiful Bill Act Changes Employee Retention Tax Credit Program
Taxpayers can appeal to the IRS Independent Office of Appeals if they contend their claim was actually filed on or before January 31, 2024, and was improperly disallowed.20IRS. IRS FAQs: Employee Retention Credits Under ERC Compliance Provisions of the One Big Beautiful Bill Beyond that narrow avenue, the retroactive nature of the provision is expected to draw due process challenges. Courts have historically upheld retroactive tax legislation so long as it serves a “rational legislative purpose” under the Supreme Court’s decision in United States v. Carlton, but critics have argued the 16-month look-back is “harsh and oppressive” and that eliminating pending refund claims could constitute a taking of protected property interests.21Fox Rothschild. The One Big Beautiful Bill Act Changes Employee Retention Tax Credit Program
The same law also imposed new due diligence requirements on people assisting with ERC claims, retroactive to March 2020, with penalties of $1,000 per claim and up to 75% of gross income for noncompliance.21Fox Rothschild. The One Big Beautiful Bill Act Changes Employee Retention Tax Credit Program Those provisions are expected to draw the same kind of Seventh Amendment challenge that Jarkesy now allows.
Voluntary Disclosure and Withdrawal
The IRS’s off-ramps for employers who received credits they weren’t entitled to have now closed, but they still shape today’s litigation. The first ERC Voluntary Disclosure Program, announced in late 2023, required participants to repay 80% of the credit in exchange for relief from civil penalties and interest, with an application deadline of March 22, 2024.22IRS. Announcement 2024-3: Employee Retention Credit Voluntary Disclosure Program A second round covering 2021 tax periods raised the repayment threshold to 85% and closed on November 22, 2024.23IRS. Employee Retention Credit Voluntary Disclosure Program
A withdrawal option for unpaid claims remained available after the formal VDP closed. Third-party payers had until December 31, 2024, to correct or consolidate claims. Participation in the VDP did not shield employers from criminal prosecution for willful fraud.23IRS. Employee Retention Credit Voluntary Disclosure Program And as Greenway made clear, an employer who came out ahead financially through amnesty may find the courthouse door closed when trying to hold a promoter to account.