Navigating ERC Challenges in 2025: Deadlines, Delays and Disallowances

As April 15, 2025 approaches – the deadline for filing Employee Retention Credit (ERC) claims for the 2021 tax year – businesses and tax professionals remain focused on the IRS’s ongoing processing of these claims. The IRS continues to address compliance issues and scrutinize promoters associated with the ERC program. This article explores three potential taxpayer scenarios in 2025 – highlighting the delays in claim processing, statute of limitations (SOL) considerations, and the management of partially or fully disallowed claims.

Scenario 1: Taxpayers Still Waiting for their ERC Claims to be Processed. 

The IRS has experienced significant backlogs in processing ERC claims, resulting in extended delays for many businesses. As of the end of 2024, the IRS had over 1 million unprocessed ERC claims. The IRS implemented several major programs over the past few years for businesses looking to correct or retract their ERC claims, including a claim withdrawal process.  

SOL Concerns 

For businesses awaiting the processing of their ERC claims, it’s crucial to understand the SOL considerations for potential IRS assessments. If the claim is formally rejected (disallowed) by the IRS, the taxpayer has two years to bring a suit seeking payment of its claim.  

Consider the following actions for claims that are still pending and unpaid: 

A.  Verify Claim Status with the IRS 

Check online IRS tools and request a transcript to confirm the ERC claim is on file. The IRS has provided online options to check claim status, although delays still occur. Taxpayers can also call the IRS ERC Hotline at 800-829-4933.  While response times vary, direct contact may clarify if additional documentation is needed.  

B. Consider Filing a Claim in Court 

Under Section 7422 of the Internal Revenue Code, taxpayers have the legal right to file a federal lawsuit in a district court with proper jurisdiction or in the Court of Federal Claims to compel the IRS to pay substantiated ERC refund claims. As noted above, the lawsuit must commence within two years of when the IRS formally disallowed a taxpayer’s ERC claim.  

Until the IRS denies a taxpayer’s ERC claim for refund, there is no SOL on the time for filing a suit under Section 7422. Theoretically, it could be filed in a few decades, and interest would continue to accrue in favor of any legitimate ERC refund (the rate is currently 7%). 

Scenario 2: Taxpayers who have already received refunds for ERC claims  

It’s also important for taxpayers who have already received refunds for their ERC claims to know when the SOL expires. 

• For 2020 ERC claims, the IRS had until April 15, 2024 to assess additional taxes unless extended under specific conditions. 

• For 2021 ERC claims, the SOL varies by quarter: 

• First and second quarters: The standard three-year SOL applies, expiring on April 15, 2025 (with some exceptions discussed below). 

• Third and fourth quarters: Under the American Rescue Plan Act (ARPA), the SOL for IRS assessments is extended to five years, expiring on April 15, 2027. The period to apply for any ERC refunds, however, remains three years and expires on April 15, 2025. 

• Generally, the IRS has three years from the filing date of Form 941 to propose employment tax adjustments. However, the IRS may have up to six years to assess certain ERC claims under proposed changes. 

• The IRS recently implemented two Voluntary Disclosure Programs (VDP) to allow taxpayers to repay ERC refunds they received, but for which they no longer believe they are entitled. Both VDP initiatives, however, are no longer available. It is uncertain whether the IRS will unveil a third VDP program. 

Erroneous refund statute considerations 

Under IRC Section 7405, the IRS has two years from the date the refund was issued to recover an erroneous refund. This period extends to five years if the refund was obtained fraudulently. 

Fraudulent ERC claims and statute considerations 

​The SOL for fraudulent ERC claims varies based on whether the IRS pursues civil or criminal action.  

• Civil tax fraud: In cases of civil tax fraud, the government can impose a penalty equal to 75% of the underpayment of tax resulting from fraud. To impose the fraudulent underpayment penalty, the government must present clear and convincing evidence that a portion of the underpayment is due to fraud.   
  • No SOL: In cases of civil tax fraud, the IRS can assess additional taxes, penalties and interest at any time as there is no SOL. This gives the IRS unlimited time to take civil action against the taxpayer. ​  

• Criminal tax fraud: Criminal tax fraud cases include tax evasion, willful failure to collect or pay tax, and failure to file a return or supply information. For criminal tax fraud, the IRS has six years from the date of the fraudulent act to initiate prosecution.  

• Extended assessment period for fraudulent promoter-driven ERC claims: Proposed legislation would extend the statute of limitations to six years for certain ERC claims, especially those tied to aggressive or fraudulent promoters. This would give the IRS more time to review, investigate and act against improper ERC filings. It is uncertain now if this legislation will be enacted and what its effective date would be.  

Scenario 3: Taxpayers who received a full or partial notice of disallowance of their ERC claim from the IRS 

If the IRS fully or partially disallows a previously filed ERC claim, taxpayers have two years from the date of disallowance to file a refund suit. However, due to IRS delays, some businesses’ protest letters or appeals have not been addressed within this period. 

In 2023, the IRS implemented specific procedures for handling disallowed ERC claims that differs from standard procedures. 

• Risk-based disallowance: Instead of conducting initial examinations, the IRS utilizes a risk-scoring analytic process to identify and disallow high-risk ERC claims without prior taxpayer engagement. 

• Post-disallowance review: When a taxpayer responds to a disallowance notice, the IRS conducts an audit-like review of the information provided before forwarding the case to the Independent Office of Appeals. This reverse sequence contrasts with the typical process where examinations precede disallowance. 

• Appeals office referral: After completing its internal review of a taxpayer’s ERC claim, if the IRS upholds the disallowance and the taxpayer has requested an appeal, the case is then forwarded to the IRS Independent Office of Appeals for further consideration. 

Upon receiving a Notice of Claim Disallowance (e.g., IRS Letter 105-C), taxpayers have two options: 

1. Administrative appeal: Request a review by the IRS Independent Office of Appeals. While the IRS typically suggests submitting a protest within 30 days, this is an administrative guideline, not a statutory requirement. 

2. Judicial action: File a lawsuit in a U.S. District Court or in the U.S. Court of Federal Claims. 

When a notice of disallowance is received, it’s advisable to submit a timely response to the IRS to allow them time to review and ideally resolve to your satisfaction.   

It’s important for taxpayers to remember that if a Notice of Claim Disallowance has not been resolved to their satisfaction by the IRS, they must file a suit within two years from the date on the notice. This two-year statutory period is strict, and simply responding to the administrative appeals process does not by itself extend this deadline.  If necessary, taxpayers can discuss possible extensions with the IRS, though these are not guaranteed. Consulting with legal counsel is also highly recommended to ensure all steps are taken within the required timeframes and that no opportunities for resolution are missed. 

Recommended next steps 

To navigate ongoing IRS scrutiny and delays around ERC claims, businesses should take several key actions. First, retain thorough and accurate documentation to support your ERC claim, even if the SOL appears to have lapsed. This ensures you are prepared should the IRS challenge your claim on other grounds. 

Second, closely monitor all SOL deadlines, both for claims already filed and refunds not yet received. In cases of uncertainty or impending deadlines, consult with a tax advisor (like our advisors at Sikich) or legal counsel to determine appropriate next steps. 

Finally, for businesses experiencing prolonged delays or unresolved issues, the IRS Taxpayer Advocate Service (TAS) can offer valuable assistance. TAS works with taxpayers to cut through bureaucratic red tape and may help move stalled ERC claims toward resolution. 

Last, the income tax treatment of ERC refund claims was recently updated by the IRS. Please click here to see a separate Sikich article on this latest ERC development.  

Sikich’s ERC professionals are available to discuss your situation and can assist as necessary. 

About Our Authors

Tom Bayer, CPA, CExP, has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He has deep experience providing a range of accounting, tax, and business advisory services to commercial clients across industries.

Jim Brandenburg, CPA, MST, possesses extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.

Andrew Creedon, CPA, CFE, MSA, is a senior manager specializing in forensic accounting, financial analysis, and internal controls. With 12+ years of experience, he assists clients with contract disputes, financial reconciliations, and compliance testing across industries like government contracting, construction, and defense. He also helps clients process ERC claims and determine eligibility for the ERC tax credit.