IRS Sets Deadline for Businesses Seeking COVID Employee Retention Credit Refunds

The IRS may owe tens of thousands of businesses a COVID-related refund, but companies will need to act quickly to try to claim it, tax experts said. The employee retention credit, introduced in March 2020, provided a refundable credit to eligible employers who paid some or all employees even though their businesses were suspended by a government order or experienced a significant decline in receipts.

As the pandemic evolved and extended into later years, so did the credit. Constant changes and slow IRS guidance led to widespread confusion and, eventually, abuse that forced the IRS to put a moratorium on claims on September 14, 2023 until August 8, 2024.

During summer 2024, the IRS also rejected 28,000 claims based on probabilities of fraud rather than actual examination.

Taxpayers who filed an appeal may still be waiting for an answer, but they shouldn't sit idle. There's a strict two-year limit that began when the IRS first rejected the claim to recover your refund that's about to expire. "If the deadline expires, the consequences are severe: 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," an independent National Taxpayer Advocate said.

The IRS has provided an ERC lifeline for a narrow group of taxpayers. The IRS said those who have six months or less remaining before the two-year deadline and are waiting for the IRS to consider appeals related only to Letters 105-C or 106-C disallowing an ERC refund claim can use a "streamlined" process to request an extension.

Taxpayers will be informed in writing whether the IRS has agreed to the extension. "Simply submitting a Form 907 signed by the taxpayer does not protect you unless the IRS takes action on the form as well," a partner at Frost Law said. " If the deadline passes before the IRS signs — for any reason, including an IRS processing backlog — the taxpayer is out of luck, he said.

And if for some reason a refund check arrives later, legally it is considered "erroneous" and can be clawed back.