What Should Health Businesses Know Before Pursuing ERC Refund Litigation?

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What Should Health Businesses Know Before Pursuing ERC Refund Litigation?

The Employee Retention Credit (ERC) was designed to help eligible businesses that kept employees on their payroll during certain periods of the COVID-19 pandemic. Years later, some businesses are still dealing with unpaid claims, disallowed refunds, audits, and questions about whether their claims were correct. For healthcare practices, medical offices, and other health-related businesses, deciding what to do next can be difficult, especially when a refund is at stake.

ERC Refund Litigation may be one option when a business believes a valid claim was wrongly denied and administrative efforts do not resolve the dispute. Before taking that step, a business should review its claim, gather supporting records, understand the reason for the denial, and pay close attention to filing deadlines. The IRS currently reports that thousands of ERC claims remain in different stages of review, audit, disallowance, and appeal.

Review Why the Claim Was Denied

The first step is to understand what happened to the ERC claim. A denial does not necessarily mean the business has no options. The IRS may send a notice explaining why it disallowed the claim and what rights the business has to challenge the decision.

For example, an IRS Letter 105-C explains the disallowance and includes information about appeal rights and the timeframe for filing a lawsuit. Read the notice carefully. Look at the tax period involved, the reason for the denial, and any instructions about responding. These details can affect what a business should do next.

Check the Records Behind the Claim

A business should be able to support the information used to claim the ERC. That may include payroll records, employment tax returns, financial records, government orders, calculations of qualified wages, and documents showing why the business met the requirements for the credit.

The IRS has an Employee Retention Credit Eligibility Checklist that businesses can use to review potential eligibility and identify problems with a claim. If records are missing or the calculations are unclear, it is worth addressing those issues before deciding whether litigation makes sense.

Understand the Administrative Options

Going to court is not always the first step after an ERC denial. Depending on the situation, a business may have an opportunity to respond to the IRS or seek review through the IRS Independent Office of Appeals.

A business should understand these options before deciding how to proceed. An appeal may provide another way to challenge the denial without immediately filing a lawsuit. The right approach will depend on the reason for the denial, the strength of the records, and the stage of the claim.

Watch the Filing Deadline

Timing matters when an ERC claim has been disallowed. The IRS states that taxpayers generally have two years from the date of a disallowance letter to resolve the claim administratively or file a refund suit in federal court. The deadline can depend on the date of the original notice.

Do not assume that an ongoing appeal automatically gives you more time. The IRS specifically notes that requesting review by its Independent Office of Appeals does not extend the statutory two-year deadline. Because missing the deadline can affect the ability to pursue a refund in court, businesses should check the date on their notice as soon as possible.

Gather Evidence Before Filing

A lawsuit requires more than showing that the IRS denied the claim. The business needs records that support its position.

Keep copies of the ERC claim, amended employment tax returns, IRS notices, payroll records, eligibility calculations, correspondence with the IRS, and other documents related to the claim. If a third party prepared the claim, keep records of the information and work it provided as well.

Organizing these materials early can make it easier for an attorney to review the claim and identify possible weaknesses.

Be Careful With Incorrect Claims

Not every ERC claim is valid. The IRS continues to warn businesses about incorrect claims and aggressive ERC promoters. An incorrect claim can lead to repayment, penalties, and interest.

If a business discovers that its claim may have been incorrect, it should not assume that filing a lawsuit is the answer. The IRS has procedures for certain taxpayers who want to withdraw an unpaid ERC claim.

Taking the Next Step

ERC refund litigation can be an important option for a business that believes a valid claim was wrongly denied. But it should not be treated as a simple next step after receiving an unfavorable notice.

Review the denial, check the supporting records, understand the available administrative options, and confirm the applicable deadline. Businesses considering litigation may want to consult a qualified attorney familiar with ERC disputes to understand their options, deadlines, and potential risks.