The decision in RAAM Construction, Inc. v. United States of America, is a cautionary tale for any taxpayers considering filing claims for refund seeking Employee Retention Credits (“ERC”) in District Court.
As a reminder, once the Internal Revenue Service (“IRS”) has denied a claim for refund, a taxpayer has two (2) years to file in District Court to claim the refund. If the taxpayer does not file in District Court in this time, the taxpayer cannot receive the refund.
Last summer, I wrote about how this two (2) year deadline was beginning to run for many taxpayers whose ERC claims had been denied. You can read that blog here.
RAAM Construction, Inc., a Los Angeles-area construction firm, did just that – it filed a claim for refund in District Court seeking more than $1 million in ERC refunds.
The United States counterclaimed, seeking to have RAAM Construction repay nearly $575,000 in ERC refunds RAAM Construction previously received.
RAAM Construction’s claim for the ERC was based on supply chain disruptions, restricted access to client job sites, and staggered employee shifts. While the Court acknowledged the state, county, and city all issued orders and guidance related to COVID-19, the Court held that these orders did not directly cause a suspension of RAAM Construction’s operations. The Court stated that RAAM Construction did not establish that it would not have experienced the disruption to its operations without these orders. In other words, the Court concluded that general pandemic and economic conditions, rather than the specific orders, caused the disruption to RAAM Construction’s business.
In addition to denying RAAM Construction’s claim for refund, the Court ordered RAAM Construction to repay the nearly $575,000 in ERC payments it had previously received.
This case serves as a cautionary tale for any business considering filing a claim for ERC refunds in District Court where that business previously received ERC refunds and the basis for those ERC refunds is questionable. Filing in District Court opens the door to allow the IRS to challenge those previously-issued refunds – unless the statute of limitations for the IRS to recover those funds (generally two (2) years) has expired.
While filing in District Court may be the only way to retain the possibility of receiving ERC refunds, businesses should carefully evaluate the basis for any ERC refunds previously received and the applicable statute of limitations before deciding to file in District Court.
