Taxpayer Files in US District Court as the IRS’s Failure to Act on its Appeal Was Causing the Statute of Limitations to Run Out

The court case of American Lighting Company, Inc. v. United States of America had to be filed on June 25, 2025, because it was critically close to the two-year statute of limitations for filing a tax refund suit, given the IRS’s refund claim denial date of June 26, 2023. The complaint itself explicitly states it was "Respectfully submitted, this the 25th day of June, 2025". This timing means the lawsuit was filed just one day before the two-year period from the denial date would have expired.

The reason for this precise timing and why the IRS’s lack of action put the taxpayer at risk is due to specific procedural rules governing tax refund suits and the unusual handling of Employee Retention Credit (ERC) disallowances by the IRS.

Here’s a breakdown:

  • The Two-Year Statute of Limitations for Tax Refund Suits:

    • A civil action for a tax refund generally cannot begin until six months after the claim for refund is filed, and it cannot begin after the expiration of two years from the date the Secretary notifies the taxpayer that the claim has been disallowed.
    • American Lighting asserts that its claim was "duly filed more than 6 months prior to the filing of this Complaint" and that the quarter in question was "denied by the IRS less than two years ago". The complaint further states it was filed "within two years of receiving its disallowance for the claimed quarter from the IRS".

  • American Lighting’s Attempted Administrative Appeal and IRS Unresponsiveness:

    • After the IRS disallowed its Q3 2021 ERC claim, American Lighting states that it "appealed this decision within 30 days, providing proof that it was not a recovery startup business during the claimed quarter but has not received any response from the IRS". It further emphasizes that the IRS "ignored the appeal".
    • The IRS’s basis for denial was that American Lighting exceeded the $50,000 maximum for a "recovery startup business," but American Lighting states it "was not a ’recovery start-up’" and that the IRS had paid all its other claimed quarters.

  • The Critical Non-Suspension of the Statute of Limitations for ERC Appeals:

    • A key issue highlighted by the National Taxpayer Advocate (NTA) is that, unlike typical IRS examinations where the deadline to file suit might be affected by an ongoing appeal, for ERC claims, "the two-year time frame within which a lawsuit must be initiated commences promptly upon the issuance of the Notice of Disallowance and is not suspended while the taxpayer pursues an appeal".
    • The NTA stresses, "going to Appeals does not extend this time period to file suit or for the IRS to issue a refund". If the Appeals office were to agree with the taxpayer after this two-year period has expired, the IRS could not issue a refund because it would be considered erroneous, unless the IRS and taxpayer had agreed to and signed a Form 907 to extend the period.
    • The two-year period for filing suit runs from the date on the top right-hand corner of the first page of the notice of claim disallowance.

  • Deviations from Normal IRS Procedures for ERC Disallowances:

    • The NTA observed that "the manner in which the IRS generated this most recent batch of ERC disallowances and the process the IRS will use to review taxpayers’ responses to these denials deviates significantly from normal IRS procedures".
    • Instead of a traditional examination (audit) before disallowance, the IRS conducted a "risk-scoring analytic process".
    • When taxpayers respond to an ERC disallowance notice, their response is generally first reviewed by a Revenue Agent in a "quasi-exam" process before potentially being forwarded to Appeals. This added step contributes to the "protracted proceedings".
    • Some disallowance letters for ERC claims "inadvertently omitted a paragraph highlighting the process for filing an appeal to the IRS or district court" and offered "unclear explanations of the reason(s) for the disallowance". This ambiguity likely created confusion for taxpayers regarding their rights and deadlines.

In summary, American Lighting was placed in a precarious situation where it diligently pursued an administrative appeal after the IRS’s initial denial, providing proof to correct what it viewed as an incorrect classification. However, the IRS’s unresponsiveness to this appeal and the strict, non-suspending nature of the two-year statute of limitations for ERC refund suits meant that the clock was continuously ticking down on its ability to seek judicial relief. The unique and often confusing procedural handling of ERC disallowances by the IRS further exacerbated this risk. To preserve its right to a refund, American Lighting was compelled to file its complaint on June 25, 2025, just one day before the expiration of the two-year period from the June 26, 2023, denial.

Prepared with assistance from NotebookLM.