Your ERC Claim Was Denied. The Ninth Circuit Left the Door Open — But the Clock Is Running.

If your business claimed the Employee Retention Credit and the IRS denied it, you are not out of options. But you may be running out of time.

On March 17, 2026, the Ninth Circuit issued its decision in ERC Today, LLC v. McInelly, Case No. 25-2642, and while the headlines focused on the court affirming the denial of an injunction, the real significance of the case is what the court did not decide. The Ninth Circuit explicitly declined to rule on whether the IRS’s automated system for denying ERC claims is lawful. That question remains open, and it may be the most important unresolved issue in ERC litigation.

Here’s the background. Two tax preparation firms sued the IRS, challenging its “Disallowance During Processing” program. Under this program, the IRS uses automated risk models to categorically deny thousands of ERC claims without any individualized review of the merits. The firms argued this violated the Administrative Procedure Act. The district court denied their motion for a preliminary injunction, and the Ninth Circuit affirmed.

But the Ninth Circuit affirmed on standing grounds, not on the merits. The court found that the tax preparation firms could not demonstrate Article III standing because they offered no evidence that they were making less money or spending more on representations as a result of the IRS’s processing approach. The court also rejected claims of reputational injury, holding that IRS administrative procedures are designed to protect taxpayers, not the economic interests of third-party contingency-fee firms.

That standing ruling is narrow and specific to the plaintiffs. It says nothing about whether a business whose ERC claim was actually denied would have standing to challenge the same automated processing system. Of course a business whose claim was denied has standing. The business suffered a concrete, particularized injury: the government refused to pay its refund claim. Under IRC Sections 6532 and 7422, that business can file a refund suit in federal district court or the Court of Federal Claims.

This matters because the legality of the IRS’s automated denial system has never been tested on the merits. If a court finds that categorically denying claims through a risk-scoring algorithm, without any human review of the specific facts of each claim, violates the APA or the taxpayer’s right to individualized consideration, the implications would be enormous. Thousands of denied claims could be reopened.

But here is where the urgency comes in. The IRS announced in February 2026 that it had closed all non-examined ERC claims as of December 31, 2025. Approximately 41,000 claims remain in examination or at IRS Appeals, but the rest are done. If your claim was closed without payment, you must now pursue litigation to get your refund.

The statute of limitations is the trap. Under IRC Section 6532(a), a taxpayer has two years from the date the IRS issues a disallowance letter, either Letter 105-C for a full denial or Letter 106-C for a partial denial, to file a refund suit in court. Here is the critical point that catches many business owners off guard: filing a protest with the IRS Office of Appeals does not stop that two-year clock. You can be sitting in the Appeals queue, waiting for a conference, and the two-year period can expire while you wait. If that happens, your right to sue is gone, even if your claim is completely legitimate.

The National Taxpayer Advocate reported in her 2025 Annual Report to Congress that the IRS denied 316 ERC claims simply because the two-year statute expired while the taxpayers were waiting on Appeals. Those taxpayers did everything right. They protested their denials through the proper administrative channels. The IRS just didn’t get to them in time, and the statute ran out. The NTA has called on the IRS to fix its Form 907 process, which allows taxpayers to request an extension of the two-year period, but as of now, the IRS does not have a reliable process in place for handling these extension requests during the Appeals backlog.

There is also a potential outer limit that practitioners need to be aware of. Some federal courts have applied a six-and-a-half-year limitations period measured from the date the refund claim was filed, based on the six-month waiting period under Section 6532(a)(1) plus the six-year general statute of limitations for civil claims against the government under 31 U.S.C. Section 3702(b). For ERC claims filed in 2020, that six-and-a-half-year window is approaching. This means that even without a formal denial letter from the IRS, the right to sue could expire by operation of this outer-limit theory.

The One Big Beautiful Bill Act added another layer of complexity. Under the OBBBA, the IRS can no longer allow or refund ERC claims for the third and fourth quarters of 2021 if those claims were filed after January 31, 2024. This provision took effect July 4, 2025. It also extended the IRS’s audit statute for ERC claims to six years from the date the claim was filed, giving the IRS significantly more time to claw back credits it believes were improperly claimed.

For Houston businesses that claimed the ERC and are waiting on a response, or that received a denial letter and protested to Appeals, the action items are concrete. First, pull out your Letter 105-C or 106-C and check the date. Calculate two years from that date. That is your litigation deadline, and nothing short of a signed Form 907 or a filed lawsuit will extend it. Second, if you are in Appeals and the two-year mark is approaching, you need to either get the IRS to sign Form 907 or file a protective refund suit before the deadline passes. Third, if your claim was closed without a formal denial and you never received a letter, consult with a tax attorney about whether the six-and-a-half-year outer limit applies to your situation.

The ERC was designed to help businesses survive the pandemic. The IRS’s processing of these claims has been frustrating, opaque, and in many cases arguably unlawful. The Ninth Circuit left the door open for a taxpayer with proper standing to test the legality of the automated denial system. But that door closes when the statute of limitations expires. If your claim was denied and you haven’t taken action, the clock is running.