For taxpayers that filed Employee Retention Credit (ERC) claims during the program's peak, the primary question was when the Internal Revenue Service (IRS) would process and pay those claims. Over the past several years, however, the IRS has slowed processing, increased enforcement activity and heightened scrutiny of ERC submissions. More recently, P.L. 119-21, also known as the “One Big Beautiful Bill Act” (OBBBA), added new limitations and deadlines affecting certain ERC claims, further shifting attention away from claim filing and payment toward claim validity and preservation.
This shift reflects the ERC's evolution from a refund-driven program to a controversy-driven one. According to IRS data, 17,300 claims remained open for the week ending August 1, 2026, including 2,300 under review, 2,900 pending payment or disallowance, 4,400 under audit, 6,100 awaiting review of disallowance responses and 1,600 before the IRS Independent Office of Appeals. The IRS has also stated that it continues to closely scrutinize ERC claims because of concerns about improper submissions.
As a result, the key concern for many taxpayers is no longer when they will receive a refund, but whether their claim can withstand IRS scrutiny. Taxpayers must be prepared to substantiate their eligibility, respond to audits or claim disallowances, and carefully monitor administrative and litigation deadlines that may affect their ability to challenge adverse determinations.
What New Limitation Did Congress Impose on Certain 2021 Claims?
OBBBA bars the IRS from allowing or refunding ERC claims for the third and fourth quarters of 2021 if filed after January 31, 2024. The IRS subsequently issued Fact Sheet 2025-07, explaining when a claim is considered filed and what administrative rights remain following disallowance.
Courts have already tested this retroactive limitation. In Key Meetings, Inc. v. United States, the Northern District of California dismissed a third-quarter 2021 claim, holding that the limitation barred it and that retroactive application did not violate due process. The court relied in part on the Court of Federal Claims decision in Juggler Dave & Friends, LLC v. United States, which reached the same conclusion. Together, these rulings suggest that affected taxpayers will face significant difficulty overcoming the January 31, 2024, cutoff through a constitutional challenge alone.
This limitation is separate from whether an employer otherwise qualified under the gross receipts or governmental order tests. A taxpayer can have strong eligibility facts and still hit a filing limitation for a late-filed 2021 claim. Any review should begin with the quarter claimed, the filing date, proof of submission and current procedural status.
How Are Courts Scrutinizing the Governmental Order Test?
Recent litigation shows the need to connect a taxpayer's operational suspension to a binding governmental order. In JSmith Civil, LLC v. United States, a bankruptcy court rejected a claim because the taxpayer could not identify a qualifying order requiring suspension of its construction operations. The court distinguished binding orders from nonbinding Occupational Safety and Health Administration (OSHA) and Centers for Disease Control and Prevention (CDC) recommendations, finding that general pandemic effects, including quarantine and supply delays, did not independently satisfy the standard.
Generalized statements about COVID-19 disruption are unlikely to be sufficient. A defensible position should identify the specific order, its effective dates, the operations it restricted, and whether the employer could continue those operations through telework or other modifications.
What Do Real IRS Disallowance Arguments Look Like?
In practice, we have seen the IRS advance disallowance arguments that do not hold up on closer examination. The example IRS assertions and rebuttals below illustrate the kind of reasoning taxpayers should be prepared to identify and rebut.
IRS Assertion: The Governmental Order Was Not in Effect During the Claim Period
We have seen the IRS cite a directive from months before the earliest quarter at issue, then conclude the taxpayer did not qualify because that particular order had since expired.
Our Rebuttal
Often the order the IRS analyzed is not the order the taxpayer actually relied upon. Building a quarter-by-quarter chronology of every applicable local and state order can reveal a different, continuously operative series of orders governing the taxpayer's operations throughout the real claim period. A claim's governmental-order support must be checked against the precise dates the IRS is evaluating, not the general timeline of pandemic-era orders.
IRS Assertion: Essential Business Status Defeats Eligibility
The IRS has argued that because a taxpayer was an essential business required to remain open, it categorically could not have a qualifying suspension of operations.
Our Rebuttal
Notice 2021-20, Q/A-11, expressly rejects a categorical rule of this kind. An essential business can still establish a partial suspension if, under the facts and circumstances, more than a nominal portion of its operations was suspended or modified by a governmental order. An essential designation is often the very reason operations were subject to continuous, government-mandated modification, not a basis to disqualify the claim. A blanket exclusion would improperly disqualify nearly every essential business in the country.
IRS Assertion: The Affected Operations Were Not a Large Enough Share of Total Revenue
We have seen the IRS apply the Q/A-11 safe harbor, which measures whether a suspended portion of a business represents at least 10% of total company-wide gross receipts, and conclude the taxpayer fell short.
Our Rebuttal
This applies the wrong standard. The Q/A-11 safe harbor is designed for a discrete department that is wholly closed while others continue unaffected. Where no department is closed, but every service line operates under mandated modifications, such as distancing and added sanitization time, the applicable test is instead the modification-of-operations standard in Q/A-17 and Q/A-18, which asks whether a governmental order reduced the employer's ability to provide the affected goods or services by at least 10%, measured within the affected operations themselves, not as a share of total revenue.
The pattern is consistent: Disallowance letters can misstate the facts, misapply the guidance or both. A taxpayer that treats a Letter 105-C as the final word, rather than testing each assertion against the governing orders and its own records, risks abandoning a claim that Appeals, properly presented, may well sustain.
Does IRS Guidance Control, or Do the Statute and Facts?
In Stenson Tamaddon LLC v. IRS, the District of Arizona rejected an Administrative Procedure Act challenge to IRS Notice 2021-20, concluding it was an interpretive rule rather than a legislative rule requiring notice-and-comment procedures. The guidance is not itself binding law in the same manner as the statute and Treasury regulations, so taxpayers must build their positions from the statutory requirements and their specific facts while addressing the IRS's published interpretations.
A separate challenge targeted the IRS's “Disallowance During Processing” program. In ERC Today, LLC v. McInelly, two preparation firms challenged the IRS's use of automated risk models to screen and disallow claims. On March 17, 2026, the Ninth Circuit affirmed denial of preliminary relief for lack of Article III standing, without deciding whether the program itself was lawful. The decision was designated unpublished and nonprecedential.
Taxpayers may be situated differently from preparation firms, but most should expect the dispute to turn on traditional refund claim issues: statutory eligibility, qualified wages, aggregation, Payroll Protection Program (PPP) interaction, documentation, timeliness and compliance with administrative procedures.
Does a Pending Appeal Stop the Litigation Clock?
The most urgent procedural issue is the deadline for filing a refund suit. When the IRS fully or partially disallows a claim through Letter 105-C or 106-C, the taxpayer has two years from the mailing date to resolve it administratively or file suit. A protest or request for Appeals consideration does not suspend that period.
On April 27, 2026, the IRS announced a streamlined process for certain taxpayers to request an extension using Form 907, Agreement to Extend the Time to Bring Suit. It is available to taxpayers awaiting a response to a Letter 105-C or 106-C with six months or less remaining, submitted through the IRS Document Upload Tool under the CP320B process. The extension is not automatic; it takes effect only if the IRS and taxpayer execute the agreement before the original period expires.
Taxpayers should keep a separate limitations calendar for every disallowed quarter, tracking each disallowance letter date, the two-year deadline, any protest submission, IRS correspondence, and the status of any Form 907 request. Administrative activity should never substitute for monitoring the judicial deadline.
Is Mediation Available When Appeals Reaches an Impasse?
Taxpayers who work in good faith with an Appeals officer but cannot reach agreement are not limited to a choice between accepting an unfavorable result and filing suit. On October 1, 2025, the IRS Independent Office of Appeals launched a two-year pilot of its Post-Appeals Mediation (PAM) program intended to make mediation a more attractive option before a taxpayer moves to litigation.
PAM is available at the conclusion of an unsuccessful Appeals proceeding, for both legal and factual disputes. Under the pilot, the case is reassigned to an Appeals mediator and an Appeals team with no connection to the underlying case, so the taxpayer gets a genuinely independent, fresh look rather than a continuation of the same discussion. Sessions are accelerated, typically lasting a single day, and a taxpayer may bring its own co-mediator at its own expense. PAM does not create a new layer of appeal or give Appeals special settlement authority; both sides retain full control, and no outcome can be imposed on either party.
Not every case qualifies. Cases docketed in court, designated for litigation, involving certain collection issues, or presenting “whipsaw” issues are generally excluded, and a taxpayer must first attempt in good faith to resolve the dispute with its Appeals officer before requesting PAM.
For a disallowed ERC claim where Appeals has reached an impasse but the taxpayer believes the factual record supports allowance, PAM can offer a faster, lower-cost alternative to refund litigation, provided the limitations calendar is managed alongside it.
How Can Cherry Bekaert Assist?
Cherry Bekaert helps taxpayers evaluate and defend pending, audited, or disallowed ERC claims through a structured, fact-driven process, which includes:
- Claim Viability and Risk Assessment: We independently evaluate whether each quarter satisfies the gross receipts, governmental order, or recovery startup business tests, and flag positions needing additional support, including aggregation, large employer status, wage calculations, health plan expenses, PPP interaction and tip credits.
- Documentation Reconstruction and Substantiation: Many pending claims were prepared years ago, sometimes by promoters that supplied limited workpapers. We reconcile the calculation to Forms 941 and 941-X, payroll records, ledgers, PPP forgiveness materials, tax returns, and governmental orders, building an organized factual record before the IRS requests it.
- IRS Notice and Examination Responses: Our current defense work includes preparing responses to Letters 105-C, reviewing disputed wage calculations, addressing signature and processing issues, and assembling formal response packages with supporting exhibits.
- Appeals and Mediation Support: We prepare formal protests, organize the administrative record, develop technical positions, and participate in Appeals conferences and Post-Appeals Mediation sessions with the IRS Independent Office of Appeals.
- Coordination With Legal Counsel: Cherry Bekaert Advisory LLC is not a law firm. Where refund litigation, constitutional claims, or other legal proceedings arise, we work with the taxpayer's counsel to provide technical analysis, calculation support, and workpaper organization, including on matters where we did not prepare the original claim.
Why Prepare Before the Next IRS Letter?
A taxpayer with a pending ERC claim should not mistake silence for approval. The IRS's inventory is increasingly concentrated in review, examination, disallowance response, and Appeals, meaning remaining claims are more likely to need technical substantiation than a routine status check.
Taxpayers should confirm the status of every claimed quarter, preserve proof of filing, reassess eligibility, assemble wage support, identify missing governmental orders and calendar all deadlines. For claims prepared by a promoter, an independent review is especially important before adopting that position in an audit or refund suit.
Your Guide Forward
Cherry Bekaert's Tax Credits & Incentives Advisory professionals help taxpayers move from uncertainty to a documented defense strategy. Whether a claim is pending, under examination, or formally disallowed, early preparation improves the response, preserves procedural options, and helps the taxpayer and its counsel make informed decisions about resolution or litigation.
Ready to review your claim status? Let us help you build a documented defense strategy before your next IRS letter arrives.
