The IRS may owe tens of thousands of businesses a COVID-related refund, but companies need to act quickly. The employee retention credit (ERC), introduced in March 2020, provided a refundable credit to eligible employers who kept paying workers despite pandemic disruptions.
Constant changes and abuse forced the IRS to pause claims. In summer 2024, the IRS rejected 28,000 claims based on fraud probabilities rather than actual examination, leading to potential improper rejections, said National Taxpayer Advocate Erin Collins.
Taxpayers who filed an appeal face a strict two-year limit that began when the IRS first rejected the claim. If the deadline expires, "the taxpayer loses the right to file suit in federal court, and the IRS is barred from issuing the refund, even if the claim is otherwise valid," Collins said.
How Much Money Is at Stake?
Initially, businesses could claim up to $5,000 per employee for wages paid from March 13, 2020, through Dec. 31, 2020. In 2021, Congress enhanced the credit to $7,000 per employee per quarter through Sept. 30, 2021, and allowed PPP loan recipients to participate.
Streamlined Extension Process
The IRS offers a streamlined process for those with six months or less remaining before the two-year deadline and waiting for appeals on Letters 105-C or 106-C. Eligible taxpayers must submit Form 907 via the IRS Document Upload Tool selecting notice 'CP320B'. However, "Simply submitting a Form 907 signed by the taxpayer does not protect you unless the IRS takes action on the form as well," said Peter Haukebo of Frost Law.
If the deadline passes before the IRS signs, the taxpayer is out of luck. The IRS is not required to grant the extension; it's a courtesy, not an entitlement.
What if the Deadline Nears?
Tax experts recommend: Contact Appeals to finalize the agreement; reach out to the Taxpayer Advocate Service (TAS) if delays threaten your rights; or file a lawsuit as a last resort to preserve the right to recover the refund.
Collins warned: "This new streamlined process for ERC claims is a step in the right direction ... but it highlights a broader issue. Until processes are fully aligned for all claim disallowances, taxpayers must remain vigilant."