A lawsuit over Covid-era refunds can proceed, but the court has dismissed its challenges to IRS guidance.gettyMore than five years after Congress rushed COVID relief for employers into law, courts are still sorting out who gets paid. In a recent Employee Retention Credit (ERC) case, an Ohio taxpayer was seeking more than $20 million in unpaid ERC refunds for 2021. The court allowed the refund suit to continue but dismissed the company’s Administrative Procedure Act (APA) claims.A lawsuit over Covid-era refunds can proceed, but the court has dismissed its challenges to IRS guidance.gettyBackgroundFirst Source Employee Management, Inc., an Ohio-based professional employer organization that files payroll tax returns for businesses, filed the case in the U.S. District Court for the Northern District of Ohio seeking unpaid ERC claims for the first two quarters of 2021 on behalf of its clients.The IRS has previously paid First Source’s ERC claims for some quarters in 2020, but it did not pay the company’s claims for the first and second quarters of 2021. Those unpaid claims totaled about $11.1 million for the first quarter of 2021 and approximately $9.1 million for the second quarter of 2021. First Source sued to collect those claims, plus interest.What is the ERC Program?The ERC program was intended to help businesses keep the lights on during the pandemic. Under the ERC program, eligible employers included those that paid qualified wages to some or all employees after March 12, 2020, and before January 1, 2022. Typically, to qualify, a business needed to demonstrate that a government order fully or partially suspended operations due to the pandemic during 2020 or the first three calendar quarters of 2021, or that the business experienced a specific decline in gross receipts during the relevant periods in 2020 or the first three calendar quarters of 2021. Some businesses may also have qualified as recovery startup businesses for the third or fourth quarters of 2021.In 2021, the IRS issued Notice 2021-20, which provided additional guidance on the ERC. The notice incorporated earlier IRS guidance with frequently asked questions and addressed additional questions about eligibility, claims, and other issues. The notice applied to qualified wages paid after March 12, 2020, and before January 1, 2021 (the IRS addressed the first two quarters of 2021 in Notice 2021-23). Critics, including First Source, argued that the notice does more than simply interpret the statute.What First Source Claimed in its LawsuitFirst Source sued to collect refunds it claims it is due. But as part of the lawsuit, First Source also challenged Notice 2021-20 under the Administrative Procedure Act (APA), a law that governs how federal agencies issue rules and how courts review agency action. The company wanted to stop the IRS from using Notice 2021-20 as guidance for reviewing ERC claims. First Source alleged that the IRS had relied on Notice 2021-20 to delay the processing of ERC claims and also to subject them to additional review. The company also argued that the delay deprived it of the use of money it claimed should have been refunded. That language is important because it’s the legal basis for being able to bring certain kinds of claims.(In addition to the guidance, the IRS issued a moratorium on processing new ERC claims in 2023 through the beginning of 2024. As part of the One Big Beautiful Bill Act, the IRS was barred from allowing or refunding ERC claims after July 4, 2025, for the third and fourth quarters of 2021 if those claims were filed after January 31, 2024.)The government moved to dismiss the APA claims, but not the original refund claim.What the Court RuledJudge Charles E. Fleming agreed with the government and dismissed the APA claims but left the refund claim in place.The court focused first on standing. Standing is a legal term that refers to your right to bring a lawsuit or have a court hear your case—to be heard, you typically have to show that another party has harmed you and that the fix for that harm can be found in court. The idea is to ensure that matters that end up in court aren't frivolous and are raised by the right parties.First Source had argued that the IRS’s reliance on Notice 2021-20 delayed its ERC refunds and deprived it of the use of that money. The judge accepted that a delay in receiving money can be an injury. But First Source was asking for more than just money, since it also wanted the court to bar the IRS from relying on the notice going forward.That created a problem. When a plaintiff seeks prospective relief—meaning relief aimed at preventing future harm—past injury is not enough. The plaintiff must show a real and immediate threat of future injury. That meant First Source had to show the notice could harm it again in the future. The court found that it could not. The company’s 2020 ERC claims had already been paid, and its unpaid 2021 claims were before the court in the refund case. The IRS could not apply the notice to First Source in the future in a way that would create a new injury. And a plaintiff can’t seek an injunction merely to prevent the government from applying a rule to others.The court also found that setting aside Notice 2021-20 would not necessarily result in First Source being paid. The statute (and not the notice) controls who qualifies for the ERC. Even if the notice were eliminated, the court would still have to decide whether First Source met the statutory requirements for a refund.Finally, the judge pointed to another limitation of the APA. The APA permits judicial review of final agency action only when there is no other adequate remedy in court. But here, First Source could (and had) already sued for a refund. Because that remedy was available, the court would not allow a separate APA challenge aimed at the same dispute.As a result, the APA counts were dismissed, but the refund claim remains pending.What About Loper Bright?The opinion also nods to the APA in a way that matters after Loper Bright. In that case, the Supreme Court overruled what’s known as the Chevron deference and held that the APA requires courts, and not agencies, to exercise independent judgment when interpreting statutes. After Loper Bright, courts may still consider an agency’s views, but they may not defer to an agency’s interpretation merely because a statute is ambiguous. The court must decide the best reading of the statute.That principle matters in these ERC lawsuits because so much of the IRS’s ERC administration has involved notices, frequently asked questions, and other guidance. If a taxpayer properly presents a statutory challenge to IRS guidance, Loper Bright makes clear that the court must independently interpret the statute. The IRS cannot win simply by saying its reading is the correct interpretation.But while Loper Bright may help taxpayers challenge IRS interpretations, it does not erase procedural limits. Taxpayers still need standing, a remedy the court can actually provide, and the right path for going to court. First Source did not have these here other than the refund claim.What Comes NextThis wasn’t a complete win for the government. First Source can still pursue its 2021 ERC refund claim and, in that case, even argue that the IRS got the law wrong. But it cannot turn the refund dispute into a broader fight over IRS Notice 2021-20. For now, the question before the court is simply whether First Source is entitled to be paid.The case is First Source Employee Management Inc. v. 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