PEO & ERC: The Guide to Rescue Your Refund

The Employee Retention Credit (ERC) was a crucial lifeline for businesses during the COVID-19 pandemic. However, for companies that relied on a Professional Employer Organization (PEO) or Certified Professional Employer Organization (CPEO) to file their claim, this tax relief has become a legal and financial nightmare. PEOs file ERC claims under their own Employer Identification Number (EIN), creating an opaque system where your money may be held hostage and your business could be exposed to IRS scrutiny.

If you used a PEO or third-party payroll processor for your ERC claim, you are likely facing significant delays, missing funds, or potential liabilities. Don't wait until the IRS sends an audit letter or your refund disappears. Call Frost Law today at (410) 497-5947 for a confidential, proactive case evaluation.

The PEO Black Box: Why You Can’t Get Answers from the IRS

When a PEO files your employment taxes, they use their own EIN on an aggregate Form 941. To claim the ERC on your behalf, they file the amended return (Form 941-X) and attach a detailed Schedule R, which lists all their client businesses.

The Problem of Lost Visibility

This filing method creates a black box for the client business. Because the PEO is the technical "taxpayer" to the IRS, the IRS cannot legally discuss the claim status, timing, or details with you, the business owner who is entitled to the Credit. You are left entirely dependent on the PEO for communication, which is often limited to vague, generic emails.

The Danger of Non-Processable Claims

If your PEO made an error, failed to include you on the Schedule R, or filed incorrectly, your claim could be deemed non-processable. Unfortunately, due to the limited visibility discussed above, the IRS would not inform the underlying businesses of these errors. For most 2020 claims, the statute of limitations to correct those errors has already passed, meaning a PEO’s mistake may have permanently forfeited your refund.

Four Essential Documents to Demand From Your PEO

To protect your rightful refund and verify your claim’s status, you must proactively secure concrete documentation from your PEO. If your PEO refuses to provide these, it is a major red flag that warrants legal intervention.

• Schedules R and Forms 941-X: Request copies for all quarters filed. These documents, though redacted to protect other clients, must clearly show your business’s specific allocation of the ERC credit and confirm you were actually included in the filing.
• Original Filing Date Verification: Demand the certified mail or tracking data showing the exact date the PEO mailed your original Form 941-X claims to the IRS. This date is critical for meeting tax deadlines and preserving your right to sue the government.
• IRS Form 941 Account Transcripts: These transcripts are the IRS's internal record. They will confirm the official IRS receipt date and whether any portion of the claim has been paid to the PEO.‍
• Supplemental Claim Verification: Confirm whether your PEO participated in the IRS’s Supplemental Claim program. If they did, you must verify that your specific claim was properly included, as any claim left out is deemed withdrawn.

Financial Risks and Shared Liability

The risks of using a non-certified PEO (as opposed to a CPEO) extend well beyond delayed processing; they threaten your business’s financial and legal standing.

• Audit Risk and Improper Claims: Many PEOs simply relied on the client's attestation (a simple questionnaire) to determine eligibility, providing little to no help with the complex analysis or the required documentation. Because many PEOs did not collect or review substantiating records the IRS is actively auditing these claims. An erroneous claim can trigger severe penalties and interest in addition to repayment of credits previously refunded.
• Joint and Several Liability: The IRS has made it clear: for improperly claimed credits, both the non-certified PEO and the client business are jointly and severally liable for the resulting underpayment. Your PEO's mistake instantly becomes your financial problem.
• The IRS Offset Risk: Since the PEO is the taxpayer, the IRS asserts the right to use your ERC refund to offset the PEO’s own outstanding tax liabilities. Your money could be used to pay off your PEO’s unrelated tax debt.‍
• Withheld Refunds and Interest: Numerous lawsuits allege PEOs are improperly retaining client refunds, sometimes for months or years. Crucially, PEOs often fail to remit some or all of the statutory overpayment interest—which can total 15% or more of the credit amount—effectively shortchanging the business.

When Litigation is Your Only Recourse

The complexities created by PEOs, compounded by aggressive legislation like the One Big Beautiful Bill Act (OBBBA)—which retroactively invalidated claims filed after January 31, 2024, for certain 2021 quarters—mean the PEO model has often broken down entirely.

When the IRS is stalled, or a PEO refuses to remit funds, the only path forward is often litigation. Frost Law’s attorneys have been on the front lines, representing businesses in:

• Refund Suits Against the U.S. Government: If the IRS delays your refund for more than six months, or disallows your claim, you can file a lawsuit (like the recent multi-million-dollar case against the United States) to force payment.‍
• Lawsuits Against PEOs: If your PEO is holding your money or failed to file on time, you may have grounds for legal claims, including breach of contract or conversion (the civil theft of funds).

Protect Your Refund: Don’t Let Your PEO Decide Your Fate

The ERC landscape is shrinking, and the deadlines for correcting errors or filing refund suits are either approaching or have already passed. The unique PEO relationship puts the full burden of risk and lack of transparency on your business, while the PEO controls the filing mechanics and holds the cash.

It is now more urgent than ever to have an independent legal team review your ERC claim and the actions of your PEO. Frost Law's experienced tax attorneys and litigators can perform a thorough analysis to verify the accuracy of your claim, compel the release of your funds, and, if necessary, prosecute a lawsuit on your behalf.

Do not take your PEO's word for it. Contact Frost Law immediately at (410) 497-5947 or schedule a confidential consultation to secure the ERC funds your business rightfully earned.

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