Refund Litigation

A refund denial is not always the end of the matter. When the IRS refuses to issue a refund a taxpayer expected, or issues less than what is owed, federal law gives taxpayers a path to challenge that decision in court. Knowing why the claim was denied and what the process requires is the first step toward recovering the money.

Why the IRS denies refund claims

Some denials are procedural and some rest on a substantive disagreement about whether an overpayment occurred at all. Understanding which kind of denial applies helps decide whether a legal challenge makes sense.

• Late filings: a refund generally must be claimed within three years of filing the return or two years of paying the tax, whichever is later
• Incomplete or inaccurate information: missing signatures, incorrect Social Security numbers, or math errors can trigger a rejection
• Unsubstantiated deductions or credits: the IRS may reduce or eliminate a refund it believes was claimed incorrectly
• Offset to other debts: a refund can be withheld to pay a separate obligation, such as past-due taxes or child support
• Substantive disagreement: the IRS may conclude there was no overpayment in the first place

A refund delay caused by IRS backlog or a request for more information is not the same as a formal denial, and the distinction matters for what comes next.

Suing the IRS for a denied refund

Under 26 U.S. Code Section 7422, a taxpayer must first file a claim with the IRS. Only after the claim is denied, or six months pass without a response, can a lawsuit be filed to recover the refund. Individuals, businesses, and other organizations all have the right to sue the United States where an income tax refund is wrongly withheld or underpaid.

To proceed, a timely and complete refund claim must have been filed, and the IRS must have denied it or let six months pass without a decision. The lawsuit must then be filed within two years after the IRS mails its notice denying the claim. The taxpayer must also show that an overpayment occurred and the IRS wrongly kept the funds.

Refund suits are filed in a U.S. District Court or the U.S. Court of Federal Claims. Unlike Tax Court, where the disputed tax does not have to be paid first, a refund suit requires the taxpayer to have already paid the amount in dispute.

The Employee Retention Credit

The Employee Retention Credit was introduced during the COVID-19 pandemic to help businesses retain employees. Its complex requirements made it hard for taxpayers to navigate, and the IRS struggled to distinguish legitimate claims from false ones, ultimately pausing processing of new ERC claims beginning in September 2023. Employers who claimed the credit in 2021 and reported correspondingly lower wages may still be waiting on refunds tied to a claim that has not been processed.

The statutory period for filing a 2021 income tax refund claim closed in April 2025. Where an ERC claim remains denied or unprocessed, filing suit against the IRS may be the remaining path to recovering the funds a business would otherwise have received.

How a tax refund litigation lawyer helps

A denied refund does not always mean the IRS is right. Individuals and small business owners often struggle most with these disputes, sometimes because a required form, such as a 1099-G, was never submitted on time, which makes an underlying claim harder to prove. If a refund claim was rejected and the filing was correct, a legal path may still be available, and acting quickly preserves it.