Prepared by Anthony N. Verni, Attorney at Law, CPA
The Employee Retention Credit (“ERC”), enacted under the CARES Act, has become one of the most heavily litigated COVID-19 relief provisions. At stake is whether the Internal Revenue Service (“IRS”) violated the Administrative Procedure Act (“APA”), by issuing substantive ERC rules through IRS Notices and FAQs rather than Treasury Regulations. In this IRS ERC litigation, billions of dollars of ERC claims remain in dispute, and courts are now shaping how informal agency guidance is treated under administrative law.
Background
The ERC, codified at I.R.C. § 3134, provided refundable credits to employers who retained workers during the COVID-19 pandemic. Key statutory gaps, such as defining “partial suspension” of operation, were filled by IRS Notices (e.g., Notice 2021-20) and FAQs. Critics argue this constitutes unlawful rulemaking because the IRS bypassed APA notice-and-comment procedures required for legislative rules.
Litigation Landscape
A. Stenson Tamaddon LLC v. IRS (D. Ariz. 2025)
The plaintiffs argued that Notice 2021-20 created binding rules, including the “10% nominal effect” test for partial suspension. The court upheld the Notice as interpretive, not legislative, and thus exempt from APA procedures. An appeal is pending.
B. ERC Today LLC v. McInelly (D. Ariz. 2025)
This challenge targeted the IRS’s ERC moratorium and automated “risking” model. The court denied preliminary relief, holding plaintiffs failed to show final agency action or irreparable harm.
C. Refund Litigation
Employers denied or delayed ERC refunds are increasingly filing suits under I.R.C. § 7422 after six months of IRS inaction. These suits bypass APA claims and directly contest substantive eligibility.
Administrative Law Framework
The APA requires notice-and-comment for legislative rules but exempts interpretive rules. Courts generally defer to IRS guidance under Skidmore v. Swift, giving weight to its persuasiveness, not under Chevron U.S.A. Inc. v. NRDC deference. The IRS ERC litigation illustrates the ongoing decline of Chevron deference following West Virginia v. EPA. Judicial review also requires “final agency action.” Courts have found FAQs and temporary moratoria to be non-final, limiting reviewability.
Legislative Developments
The Omnibus Budget and Business Balance Act of 2025 (“OBBBA”) imposed new ERC restrictions, including shorter claim deadlines and extended IRS assessment authority. These changes complicate pending cases, particularly with respect to retroactivity.
Practical Implications
For taxpayers, refund suits remain the most effective path to judicial relief. For practitioners, Circular 230 obligations require careful assessment of ERC claims to avoid penalties under I.R.C. §§ 6694, 6695, and 6700. For the IRS, judicial acceptance of FAQs as interpretive reinforces a pattern of informal guidance in tax administration.
Conclusion
The early judicial rejection of “no-regs” arguments in Stenson Tamaddon strengthens the IRS’s position. However, appellate review, refund litigation, and statutory changes mean that ERC disputes remain a live battleground for defining the scope of APA compliance in federal tax administration.
