There is one thing the IRS and taxpayers have in common: neither one wants to write the other a check. For taxpayers, the motivation is obvious. For the IRS, it’s more complicated—but the result is the same. The agency is staring down a mountain of refund claims it cannot process quickly, cannot resolve administratively, and increasingly cannot defend in court.
The convergence of the Employee Retention Credit backlog and the Kwong v. United States decision is creating a perfect storm of unresolved refund obligations that will inevitably spill into federal district court—landing squarely on the desk of a Department of Justice (“DOJ”) that is hemorrhaging lawyers and offering signing bonuses to keep the lights on. Just today, the DOJ filed its notice to appeal the Kwong case, meaning certainty for the IRS and taxpayers could be years away, with countless refund claims and suits being filed in the meantime.
The ERC Backlog: 597,000 Claims and Counting
The Employee Retention Credit saga has been a slow-moving mess for years. As of early 2025, over 597,000 ERC claims remained in the IRS’s inventory, with nearly 11,000 cases submitted through the Taxpayer Advocate Service still unresolved. In its Fiscal Year 2026 Objective Report to Congress, the National Taxpayer Advocate reported that the IRS received nearly 5 million ERC claims in total. In addition to the unprocessed claims, the IRS has disallowed—in whole or in part—hundreds of thousands of ERC claims.
The problems do not stop once a claim is denied. The IRS’s communication with businesses whose claims were fully or partially disallowed has been unclear, often lacking information about how to appeal or any meaningful explanation for the basis of the disallowance. The National Taxpayer Advocate described the ERC program as “a cautionary example of poor tax credit administration, marked by excessive processing delays, opaque communications, and insufficient taxpayer support.” The average time from a taxpayer’s initial request for appeal to resolution—including both IRS compliance and Appeals review—was 337 days in fiscal year 2025.
The larger problem lies beyond the disallowance. Once the IRS disallows a claim for refund, the taxpayer has just two years to file suit. If that window closes, the IRS is legally barred from paying the refund, even if it later agrees the taxpayer was right. And the only way to extend that deadline is to get the IRS to execute Form 907, Agreement to Extend the Time to Bring Suit. But getting someone at the IRS to sign these forms can be a challenge. Taxpayers whose protested disallowance notices are sitting in administrative limbo—with little to no communication from the IRS—are watching their two-year windows expire in real time.
Kwong: The Tidal Wave Nobody Saw Coming
If the ERC backlog is a slow burn, Kwong v. United States is a sudden flood. In November 2025, the U.S. Court of Federal Claims ruled that former I.R.C. § 7508A(d) required a mandatory, automatic extension of federal tax deadlines for the entire duration of the COVID-19 disaster period—from January 20, 2020, through July 10, 2023. That is more than three and a half years of suspended deadlines. Under the court’s reasoning, the IRS should not have assessed failure-to-file penalties, failure-to-pay penalties, or underpayment interest during that entire window. The court rejected the IRS’s regulation that attempted to cap the disaster extension at one year, finding it “misread” the statute. Today, the IRS filed its notice to appeal that decision.
The National Taxpayer Advocate has said that “tens of millions of taxpayers may be entitled to refunds or abatements” of penalties and interest assessed during this period. To put this in perspective, in fiscal year 2022 alone, the IRS levied more than 12 million estimated-tax penalties and more than 16 million failure-to-pay penalties. The National Taxpayer Advocate has urged taxpayers to file protective claims using Form 843 by July 10, 2026, to preserve their rights—and has pointedly noted that the IRS still does not allow taxpayers to file Form 843 electronically. Every single one of these claims must be submitted on paper.
As a result, we can expect millions of paper claims, filed by the July 10, 2026 deadline, flooding into an IRS that has lost over 25% of its workforce since the start of 2025 and now has fewer than 76,000 employees. The Taxpayer Services division alone lost over 21% of its workforce, and the administration’s budget proposal recommends a 20% reduction in appropriated IRS funding next year.
The IRS has formally filed its notice of appeal in Kwong. But the case builds on the Tax Court’s 2024 ruling in Abdo v. Commissioner, which reached a similar conclusion and was not appealed. Two courts have now independently invalidated the IRS’s regulatory cap on disaster extensions. The government is fighting an uphill battle.
Where Do All These Claims End Up? Federal Court.
Here is the math that should concern everyone at the DOJ. Disallowed ERC claims that are not resolved by the IRS internal administrative process within 2 years will be forced into federal courts. And Kwong-related claims that the IRS denies—or simply sits on—will also lead to refund suits in federal court.
This means there are hundreds of thousands of ERC refund claims and potentially millions of Kwong-related penalty and interest refund claims that could ripen into litigation if the IRS fails to act administratively. Each one of those cases becomes the responsibility of the DOJ Civil Division’s Tax Litigation Branch (formerly “Tax Division”) when it lands in court.
The DOJ Can’t Staff Its Way Out of This
The DOJ is not in a position to handle this wave. The DOJ had an estimated 10,000 attorneys when the administration changed in January 2025. By September 2025, that number had been cut nearly in half. More than a quarter of the department’s lawyers have quit or been fired since the beginning of last year.
The staffing crisis has become so acute that the DOJ’s Civil Division began offering $25,000 signing bonuses to new hires in May 2026 and retention incentive allowances of $60 to $220 per pay period to current attorneys. The department also revoked its long-standing requirement that newly hired prosecutors have at least one year of experience practicing law. In other words, DOJ is now offering to pay people with no legal experience to walk in the door—something that would have been unthinkable even two years ago.
Now layer in the tax refund litigation heading DOJ’s way. The Tax Litigation Branch handles every federal tax refund suit—ERC disallowances, Kwong-related penalty claims, in addition to run-of-the-mill tax refund litigation. It draws from the same depleted talent pool as the rest of the department. When hundreds of thousands of unresolved ERC claims and potentially millions of Kwong refund claims ripen into lawsuits, the Tax Litigation Branch will need experienced litigators who understand the Internal Revenue Code. The gap between what is coming and what the department can handle is only getting wider.
The Punchline
The IRS does not want to write refund checks. It has made that abundantly clear through years of ERC processing delays, opaque disallowance notices, administrative bottlenecks, and a refusal to engage meaningfully with Kwong. But every claim it refuses to resolve becomes a lawsuit that DOJ must defend. And DOJ is offering signing bonuses to lawyers who have never practiced law, just to fill empty chairs.
The taxpayers filing protective Kwong claims and contesting ERC disallowances are not going away. They are going to court. And when they get there, they will find an understaffed, overworked Tax Litigation Branch that is simultaneously trying to manage a tidal wave of existing litigation while watching experienced colleagues leave for the private sector. The IRS’s refusal to write checks today is simply deferring the cost—with interest—to tomorrow’s courtroom. And if there is one thing the IRS should understand by now, it is how interest compounds.
