IRS Offers Extension for Disputed COVID-Era Employee Retention Credit Claims

WASHINGTON — The Internal Revenue Service announced this week a new, streamlined process for businesses to request more time to resolve disputes over disallowed Employee Retention Credit (ERC) claims, a move aimed at preventing thousands of companies from losing their appeal rights due to administrative backlogs. Under the new procedure, taxpayers whose ERC claims have been rejected can file Form 907, “Agreement to Extend the Time to Bring Suit,” to pause the two-year statute of limitations for filing a refund lawsuit in federal court. This provides additional time for the IRS and its Independent Office of Appeals to complete a review of the taxpayer’s response to the disallowance, addressing a situation that the National Taxpayer Advocate had described as “fundamentally unfair.” The change directly impacts a significant number of small and mid-sized businesses that took advantage of the ERC, a key pandemic-era relief program designed to help employers keep staff on their payroll. The credit has since become a major focus of IRS compliance efforts due to widespread fraudulent or improper claims, leading the agency to issue tens of thousands of disallowance notices. In the summer of 2024 alone, the IRS sent approximately 28,000 such notices. According to an analysis by National Taxpayer Advocate Erin Collins, many of these rejections were based on automated risk-filter analyses rather than a full examination of the claim’s merits. The problem arose because the issuance of a disallowance notice automatically started a two-year countdown for the taxpayer to file a lawsuit. However, in many cases, the IRS’s own compliance review of the taxpayer's appeal had not yet been completed. “As a result, some taxpayers may reach the end of the two-year period before the IRS completes its review, losing their right to both a refund and judicial review,” Collins wrote in a blog post accompanying the IRS announcement. She argued that this created a situation where “administrative delay alone can determine the outcome” and that businesses should not be forced to file costly “protective lawsuits” simply to preserve their legal rights while waiting for the agency to act. The new option to file Form 907 is intended to alleviate this pressure. By signing the agreement, both the taxpayer and the IRS consent to extend the deadline, allowing the administrative appeals process to run its course. This helps both parties avoid unnecessary litigation and provides a clearer path to resolution for complex cases. Glen Frost, a managing partner at a law firm that has handled numerous ERC cases, noted that the IRS’s decision is beneficial for both the agency and for taxpayers. It allows the IRS to manage its massive caseload more effectively while giving businesses a fair opportunity to have their case heard without resorting to premature court filings. The ERC has been a critical but complicated component of federal COVID-19 relief. Its complex eligibility rules, which involve factors like significant declines in gross receipts or full or partial government-ordered suspensions of operations, have led to confusion and a flood of claims promoted by aggressive marketing firms. In response, the IRS has intensified scrutiny, placing a moratorium on processing new claims and launching extensive audit and criminal investigation programs. This new extension process is part of a broader effort by the IRS to manage the fallout from various pandemic-era tax provisions. In a separate but related development, the agency is also facing a July 10 deadline for taxpayers to claim refunds for certain penalties and interest improperly charged between 2020 and 2023. That opportunity stems from a court ruling, Kwong v. United States, which found that the IRS had not provided the full penalty relief period mandated by federal disaster relief statutes during the pandemic. While the extension provides breathing room, it also signals that claims entering this process will face detailed scrutiny. This is not a blanket approval or a softening of the IRS's stance on ERC eligibility; it is a procedural correction. In our experience, businesses with legitimate claims were being unfairly squeezed by a statutory deadline clashing with the agency's own processing delays. This fix is welcome, but it underscores the absolute necessity of having flawless documentation and a robust, well-argued case for eligibility. A request for more time will only be granted if the underlying claim has merit, and the subsequent review will be thorough. Navigating these procedural complexities is a core part of our firm's tax preparation and compliance services, which are designed to manage these exact types of high-stakes interactions with the IRS. For business owners facing a disallowed ERC claim, professional guidance is critical to protecting your rights and presenting the strongest possible case. C&S Finance Group LLC can help assess your options and ensure all procedural requirements are met; you can learn more at csfinancegroup.com. Moving forward, businesses that have received ERC disallowance notices, particularly from the large batch issued in mid-2024, will need to carefully evaluate their timelines and decide whether to request an extension via Form 907. The IRS will continue its work processing the immense backlog of claims and appeals, with this new procedure potentially streamlining the resolution of thousands of legitimate but complex cases while the agency continues its enforcement efforts against fraudulent ones.