The administration and subsequent enforcement of the Employee Retention Credit (ERC) under 26 U.S.C. § 3134 has generated a wave of compliance challenges, processing delays, and subsequent litigation. For tax professionals advising clients on payroll tax refund claims, the recent unpublished memorandum decision from the Ninth Circuit Court of Appeals in ERC Today, LLC v. McInelly, No. 25-2642 (9th Cir. Mar. 17, 2026) offers critical insights into how the federal judiciary views standing and procedural challenges brought by third-party tax preparation firms against the Internal Revenue Service.

Facts of the Case

The ERC was originally enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 to provide financial stimulus to employers experiencing full or partial suspensions of operations or significant declines in gross receipts. Faced with an influx of aggressively marketed claims and a backlog exceeding 1.1 million unprocessed Form 941-X returns by late 2023, the IRS instituted a processing moratorium. During this period, the IRS implemented a new review protocol known as the "Disallowance During Processing" (DDP) program, which utilized automated risk assessment models and entity-level filters to categorically disallow thousands of claims without individualized, manual review.

Following the implementation of the DDP program, the IRS began issuing summary notices of full or partial disallowance via Letter 105-C and Letter 106-C. The plaintiffs in this case, ERC Today, LLC and Stenson Tamaddon, LLC, are tax preparation firms that assist taxpayers in claiming the ERC in exchange for contingency fees. The plaintiffs alleged that the IRS and its officers acted arbitrarily and capriciously by denying clearly eligible claims under the automated DDP program, which subsequently harmed the firms’ business operations.

Taxpayers’ Request for Relief

The plaintiffs initiated litigation in the U.S. District Court for the District of Arizona, seeking a mandatory preliminary injunction against the IRS. Specifically, the firms petitioned the court to compel the agency to pause the DDP program, cease the issuance of summary denials based on automated software filters, restore prior manual ERC processing procedures, provide adequate notice of deficiencies, and vacate all disallowances previously issued under the DDP program.

The District Court Decision and Analysis of the Law

In an order issued April 7, 2025, the District Court (ERC Today LLC, et al. v. John McInelly, et al., No. CV-24-03178-PHX-SMM) denied the plaintiffs’ motion for a preliminary injunction. Analyzing the request under the four-factor test established in Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 30 (2008), the District Court focused primarily on Article III standing. The lower court found that while the plaintiffs had established an injury-in-fact and causation based on their percentage-of-recovery fee structures, they failed to make a clear showing of redressability. The District Court reasoned that it was purely speculative whether enjoining the IRS’s automated "risking" model would ultimately result in a higher approval rate for the plaintiffs’ clients, particularly given prior Treasury Inspector General for Tax Administration (TIGTA) findings that previous expedited reviews had resulted in over-approvals.

Furthermore, the District Court dismissed the plaintiffs’ Administrative Procedure Act (APA) claims, holding that the "risking" model did not constitute a "final agency action" under 5 U.S.C. § 704 because the ultimate allowance or disallowance of an individual tax claim—rather than the internal procedure used to process it—marks the consummation of the agency’s decision-making. The lower court also noted that the tax preparation firms lacked third-party standing to assert Fifth Amendment substantive due process claims on behalf of their clients.

The Appellate Court’s Application of the Law to the Facts

The plaintiffs appealed the denial of the preliminary injunction to the Ninth Circuit, which reviewed the issue of standing de novo, citing Isaacson v. Mayes, 84 F.4th 1089, 1095 (9th Cir. 2023). The appellate panel affirmed the District Court’s denial but arrived at its conclusion by dismantling the plaintiffs’ foundational claims of an injury-in-fact.

The Ninth Circuit panel emphasized that Article III standing requires "(1) an injury-in-fact, (2) caused by the defendant’s acts, (3) that likely would be redressed by the requested judicial relief" (Coastal Env’t Rts. Found. v. Naples Rest. Grp., LLC, 158 F.4th 1052, 1057 (9th Cir. 2025)). Because the plaintiffs were seeking an extraordinary remedy, the court noted that "[a]t the preliminary injunction stage, the plaintiffs ’must make a clear showing of each element of standing’ . . . ." (LA All. for Hum. Rts. v. County of Los Angeles, 14 F.4th 947, 957 (9th Cir. 2021) (quoting Yazzie v. Hobbs, 977 F.3d 964, 966 (9th Cir. 2020))).

Addressing the financial injury, the appellate court observed that while the plaintiffs alleged lost revenue and increased post-disallowance representation costs due to their contingency agreements, the evidentiary record failed to support these claims. The court applied the law strictly to the facts, noting the appellants "offer no evidence that they are making less money based on the aggregate rate of approvals versus disallowances of their clients’ claims or that they spend more money on their client representations under the DDP program". The panel concluded that "[w]ithout such evidence, Appellants have not made the requisite ’clear showing’ of financial injury".

The Ninth Circuit also rejected the plaintiffs’ alternative theories of procedural, reputational, and regulatory harm. Regarding procedural injury, the court cited Sterling v. Feek, 150 F.4th 1235, 1246 (9th Cir. 2025), holding that "[a] plaintiff establishes ’procedural standing’ by showing that he was accorded a procedural right to protect his interests, and that he has concrete interests that are threatened". Because IRS administrative review procedures are designed strictly to protect the financial rights of the taxpayers—not the economic interests of third-party contingency fee firms—the plaintiffs suffered no cognizable procedural injury.

Addressing the claim of reputational damage, the panel applied Sweet v. Cardona, 121 F.4th 32, 42–43 (9th Cir. 2024), noting that reputational harm is only concrete "if it is disparaging or impugns the professional integrity of its subject," or "if it would subject a person to hatred, contempt, or ridicule". The court observed that the DDP denial letters issued to taxpayers do not identify or refer to the tax preparation firms, effectively neutralizing any claim of reputational injury. Finally, the court relied on Clapper v. Amnesty Int’l USA, 568 U.S. 398, 410 (2013) to reject the appellants’ regulatory injury argument, characterizing it as a "highly speculative fear" resting upon a "highly attenuated chain of possibilities".

Conclusions

The Ninth Circuit affirmed the District Court’s denial of the preliminary injunction, concluding that the tax preparation firms fundamentally failed to make the clear showing of injury required to establish Article III standing at this preliminary stage of litigation. Because the standing defects were fatal to the injunction request, the panel declined to reach the merits of the plaintiffs’ remaining arguments.

However, the Ninth Circuit did not dismiss the underlying complaint entirely. Instead, the appellate panel remanded the case to the District Court for further proceedings, explicitly recognizing that the plaintiffs "could potentially cure the injury-in-fact shortcomings in their Complaint if given leave to amend". Relying on the liberal amendment policies of the federal judiciary, the panel quoted Fed. R. Civ. P. 15(a)(2), noting, "The court should freely give leave [to amend] when justice so requires".

For CPAs and EAs, this ruling serves as a reminder that while the IRS’s automated ERC disallowance procedures present significant hurdles for eligible taxpayers, tax professionals generally lack the legal standing to challenge these administrative processes directly on behalf of their clients’ rights. Practitioners must instead focus their efforts on meticulous claim substantiation and guiding their clients through traditional post-disallowance administrative appeals and refund litigation venues.

Prepared with assistance from NotebookLM.