A strict two-year deadline to file a refund lawsuit is approaching for denied Employee Retention Credit (“ERC”) claims, and taxpayers facing recapture on previously issued ERC claims have limited windows to challenge Internal Revenue Service (“IRS”) collection efforts. Furthermore, IRS appeals backlogs mean taxpayers cannot rely on the administrative process to timely resolve their claims before the statute of limitations to initiate a lawsuit expires. This article outlines key procedural deadlines and strategic options available to taxpayers in either situation.
Congress created the ERC during the COVID-19 pandemic to assist employers in retaining their employees. ERCs provide employers with a refundable payroll tax credit against certain employment taxes. To qualify, a taxpayer must demonstrate either (1) a significant decline in gross receipts, or (2) a full or partial suspension of operations due to a government order. As ERC claim volumes surged, so did IRS scrutiny. The IRS imposed a temporary moratorium on processing new ERC claims in September 2023 amid concerns about fraud and ineligible filings. By that time, the IRS had formally disallowed more than 28,000 ERC claims totaling an estimated $5 billion. The IRS has also begun recapture efforts against taxpayers who received credits the IRS initially approved but now claims were improper. The IRS lifted its moratorium in August 2024, announcing it would resume processing claims filed between September 14, 2023, and January 31, 2024. According to a February 2026 GAO report to Congress, the IRS informed the GAO that it had closed most remaining ERC claims as of December 31, 2025, despite not publicly disclosing this information until January 2026.[1]
Taxpayers facing either denied claims or recapture now face critical decisions about how to protect their rights.
Denied Claims: Deadlines and Procedures
ERC disputes typically commence when the IRS either issues a formal denial letter or fails to respond to a taxpayer’s refund claim. When the IRS proposes to deny or reduce an ERC claim, it first issues Letter 5376, an informal proposed disallowance. After receiving this letter, the taxpayer has 30 days to either request a conference with the IRS or file a formal protest to challenge the disallowance before IRS Appeals. Critically, Letter 5376 does not start the two-year statute of limitations for filing suit; only a formal denial letter triggers that deadline.
Taxpayers who receive a formal notice of claim disallowance in the form of Letter 105-C (full disallowance) or Letter 106-C (partial disallowance) have two years from the date of that letter to file a refund lawsuit. Importantly, this deadline does not pause if the taxpayer appeals to the IRS Independent Office of Appeals. Compounding this concern, the Office of Appeals is currently experiencing significant delays and backlogs. The National Taxpayer Advocate has publicly raised concerns that taxpayers may lose their rights because the agency cannot process their cases in time.[2]
If a taxpayer does not pursue an appeal, or the IRS proceeds directly to a formal disallowance without offering an informal conference, the taxpayer will receive a formal denial letter which triggers the two-year statute of limitations for filing a refund suit. The IRS and a taxpayer may extend this deadline via a written agreement. However, taxpayers should be aware that the limitations period does not automatically extend simply because a case is pending before IRS Appeals. If the Appeals process does not resolve the dispute, or if timing considerations require more immediate action, a taxpayer may file a refund suit in either the U.S. District Court or the U.S. Court of Federal Claims.
Whether a taxpayer is proceeding through appeals or headed to court, the outcome depends on the facts supporting the ERC claim. The taxpayer must be able to demonstrate either (1) a significant decline in gross receipts, or (2) a full or partial suspension of operations due to a government order.
Recapture: When the IRS Seeks to Claw Back Credits
Taxpayers who have already received ERC payments face a different challenge. The IRS has the authority to recapture credits it believes it allowed erroneously. The recapture process follows a distinct procedural path with its own deadlines and response options.
The IRS initiates recapture by issuing Letter 6577-C, notifying the taxpayer that the ERC claim was allegedly improper. The taxpayer may challenge the proposed recapture by responding to the letter within 30 days with a statement explaining the basis for disagreement and including relevant facts to support the claim. Failing to respond within this window significantly weakens the taxpayer’s position.
The IRS may proceed with collection despite a taxpayer’s response, or lack thereof, only after notifying the taxpayer via Letter 3172 (Notice of Federal Tax Lien Filing) and/or Letter 1058 (Final Notice of Intent to Levy). These notices trigger important procedural rights including the right for a taxpayer to request a hearing before IRS Appeals via Form 12153, Request for a Collection Due Process (“CDP”) or Equivalent Hearing. If the CDP hearing is requested within 30 days of the collection notice, the taxpayer preserves the right to seek U.S. Tax Court review of the Appeals determination.
The statute of limitations provides an important defense for some taxpayers facing recapture. The IRS generally has three years to recapture ERC attributable to 2020 and Q1/Q2 of 2021, running from the later of the filing date or April 15 of the following calendar year. The statute of limitations insulates most claims the IRS paid before the September 2023 moratorium from administrative recapture. However, Congress provided the IRS with a five-year statute of limitations for ERC claims attributable to Q3 and Q4 of 2021, extending the recapture window until April 15, 2027. There is no time limit for the IRS to recapture fraudulent claims.
Taxpayers facing recapture should consider several strategic options: (1) respond promptly and thoroughly to Letter 6577-C with documentation supporting the claim’s validity; (2) if collection proceeds, timely request a CDP hearing to preserve Tax Court review rights; (3) evaluate whether the statute of limitations bars recapture for the relevant quarters; and (4) assess whether the substantive merits of the original claim can withstand IRS scrutiny.
Strategic Considerations for All Taxpayers
Whether facing a denied claim or a recapture effort, the most important initial step is to identify the applicable deadline. For denied claims, if the taxpayer received a formal notice of disallowance, the two-year period to file suit runs from the date of that letter and missing the deadline is not recoverable. For recapture situations, the 30-day window to respond to Letter 6577-C and to request a CDP hearing is equally critical.
Given well-documented backlogs, IRS Appeals review may take several months and potentially even a year. For denied claims, if a refund suit is not filed within the two-year statute of limitations period, or the period is not otherwise extended by agreement, the statute bars the IRS from issuing payment even if IRS Appeals later determines that the IRS should have allowed the credit in the first place. For recapture cases, delays in requesting a CDP hearing can forfeit Tax Court review rights entirely.
Taxpayers in either situation should not wait to organize their documentation. They should confirm that all powers of attorney are current and that any representative appearing before the IRS is properly authorized. More importantly, taxpayers should begin assembling their factual record immediately: gather the government orders being relied upon, map each order to the business’s specific operations during the relevant period, and quantify the impact with as much precision as the evidence permits. Contemporaneous documentation is of critical importance. Whether the case is resolved in Appeals, through a CDP hearing, or in court, the strength of the documentation will determine the strength of the position.
For taxpayers who have built a strong factual record, recent legal developments offer additional reason for optimism, the Supreme Court’s 2024 Loper Bright[3] decision eliminated a longstanding principle requiring courts to defer to the IRS’s interpretation of ambiguous tax laws. Courts now interpret the statute directly and consider IRS guidance only to the extent it is persuasive, meaning a well-documented, statute-grounded claim receives a fair hearing even if the IRS has adopted a contrary position. As a result, several taxpayers with disallowed claims have filed suit on the ground that IRS FAQ guidance (later republished as Notice 2021-20) failed to comply with notice-and-comment rulemaking as required by the Administrative Procedure Act, seeking to have the informal guidance set aside and their disallowances reversed.[4]
Taxpayers should also be aware of potential cost recovery. Under the Internal Revenue Code, if the taxpayer substantially prevails in litigation and meets certain size and net-worth thresholds, the taxpayer may be able to recover reasonable attorneys’ fees from the government—particularly if the IRS’s position was not well-founded. This applies to both refund suits and Tax Court proceedings. However, this option is not automatic and requires exhaustion of administrative remedies before proceeding to court. Omitting that step forfeits the ability to seek cost recovery, regardless of how the underlying case resolves.
Potential Outcomes and Resolution Paths
The resolution of an ERC dispute, whether a denied claim or a recapture matter, may occur through several avenues. For denied claims, the most common resolution occurs at the Appeals level, where an independent officer weighs the law and the facts on their merits. For recapture cases, a CDP hearing serves a similar function, with the added possibility of Tax Court review. Many cases settle at these administrative stages, which are often the most expedient and cost-effective paths to resolution.
If the case proceeds to court, whether via a refund suit for a denied claim or a Tax Court review of a CDP determination, the range of outcomes expands considerably. A court may award the full refund claimed (or find the recapture improper), a portion thereof, or nothing at all, depending on how the evidence withstands scrutiny and how the statute applies to the specific facts. There is no guaranteed middle ground; the result will depend on the quality of the documentation and the strength of the legal arguments presented.
The most consequential outcome in ERC disputes is the extinguishment of rights through procedural default. For denied claims, failure to initiate litigation within the two-year statutory period following a formal denial constitutes an absolute bar to further adjudication, irrespective of the underlying merits. For recapture cases, failure to timely request a CDP hearing forfeits Tax Court review rights. Unlike certain procedural deficiencies that may be cured through subsequent filings or equitable tolling, no court can remedy these jurisdictional limitations once those periods have passed.
For claimants approaching the two-year anniversary of a formal denial or facing imminent deadlines to respond to recapture notices, immediate action is imperative. Neither administrative Appeals backlogs nor pending IRS review prevent statutory filing deadlines from passing. Claimants must either secure a written extension agreement pursuant to applicable regulations, commence litigation, or timely request a CDP hearing to preserve their rights.
[1] U.S. Gov’t Accountability Off., IRS Can Use Lessons Learned to Address and Prevent Improper Payments in Future Tax Programs, GAO-26-107456, at 12 (February 10, 2026), https://files.gao.gov/reports/GAO-26-107456/index.html.
[2] Nat’l Taxpayer Advoc., 2024 Annual Report to Congress (2025), https://www.taxpayeradvocate.irs.gov/reports/2024-annual-report-to-congress/; Nat’l Taxpayer Advoc., 2025 Annual Report to Congress (2026), https://www.taxpayeradvocate.irs.gov/reports/2025-annual-report-to-congress/.
[3] Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024).
[4] Stenson Tamaddon, LLC v. Internal Revenue Service, No. CV-24-01123-PHX-SPL, 2025 WL 1725942 (D. Ariz. June 20, 2025).