TL;DR: A federal court dismissed Sevillo Fine Foods’ Employee Retention Credit (ERC) claim in September 2026, ruling that port congestion and indirect supply chain delays do not qualify as a governmental order suspending operations under the CARES Act. If the IRS is auditing your ERC claim based on supply chain disruption, this case signals that courts and the IRS apply a very narrow standard, and you should seek qualified tax debt relief help immediately.
By Fresh Start InitiativeIf you claimed the Employee Retention Credit based on pandemic supply chain disruptions, you may have been watching recent court decisions closely. A new ruling out of Utah just made that landscape even harder to navigate, and the IRS is paying attention.
Many businesses, especially manufacturers and distributors, believed they had a solid ERC case. Their suppliers were delayed. Their production was affected. Their costs spiked. The logic seemed clear. But as the Sevillo Fine Foods case shows, what feels like a qualifying disruption and what the law actually requires are two very different things.
You are not alone if you are facing an audit, a disallowance letter, or growing uncertainty about your credit. This article breaks down the ruling, explains what it means for businesses still under IRS review, and walks you through the steps you can take right now to protect yourself.
What Happened in the Sevillo Fine Foods Case
The case, Sevillo Fine Foods LLC v. United States, No. 2:25-cv-00273-DBP, was decided in the District of Utah on September 28, 2026. The court granted the government’s Motion to Dismiss for Failure to State a Claim, signed by Magistrate Judge Dustin B. Pead.
Sevillo relied on a single Turkish supplier for specially processed tomato products used in approximately 75% of its products, which traveled through the Port of Long Beach before reaching its Utah facility. Sevillo alleged that COVID-19-related governmental measures reduced port staffing, contributed to congestion and shipping delays, restricted production, and forced the cancellation of customer orders.
The court concluded that the identified governmental measures either were not qualifying orders or did not require the port to suspend commerce, and that the causal chain from workplace restrictions through port operations and independent ocean carriers to Sevillo’s Utah operations was too attenuated. In plain terms, the connection between a government rule and Sevillo’s actual business disruption was simply too many steps removed to count.
The court also rejected the company’s reliance on IRS supply chain guidance because that guidance contemplated a qualifying governmental order suspending the supplier’s operations. Sevillo’s Turkish supplier continued manufacturing and shipping the tomato products, and the interruption occurred principally during transportation through a congested but operating port.
Why the Court’s Reasoning Matters Beyond This One Case
A significant subset of ERC claims filed during the pandemic relied on indirect supply chain disruptions, arguing that upstream bottlenecks such as maritime port congestion constituted a partial suspension of business operations. The Sevillo ruling signals that courts are not buying that argument.
Magistrate Judge Pead granted the government’s partial motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, dealing a decisive blow to supply chain ERC claims predicated on generalized port delays and indirect workplace safety regulations. This is not an isolated opinion. It follows a consistent line of IRS guidance and other court decisions applying equally strict standards.
The statutory phrase “due to” in Section 2301(c)(2)(A)(ii)(I) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) requires both factual (but-for) and proximate cause, barring claims linked through an attenuated supply chain. If you claimed the ERC using a multi-step causal chain, that chain just became significantly harder to defend.
What the IRS Has Said About Supply Chain ERC Claims All Along
The Sevillo ruling did not come out of nowhere. The IRS had been telegraphing its position for years, and the court largely agreed with how the agency reads the law.
The IRS, in Notice 2021-20, allowed certain employers to claim the ERC if they had to suspend their business operations because their critical goods or materials suppliers’ businesses were suspended by government order. That sounds broad, but the IRS made clear it was anything but.
An employer’s substantiation of ERC eligibility based on supply chain disruption must include identification of the specific governmental order that suspended the supplier’s business. Merely citing a bottleneck at a port or a truck driver shortage, without identifying the specific governmental order causing the bottleneck or driver shortage, is insufficient to substantiate a full or partial suspension of operations.
On July 21, 2023, the IRS released a Generic Legal Advice Memorandum (GLAM) clarifying its interpretation of ERC eligibility based on supply chain disruptions. In this GLAM, the IRS made clear that it views a supply chain disruption, by itself, as wholly insufficient to qualify a business for ERC.
The IRS stated it “is seeing repeated instances of people improperly citing supply chain issues as a basis for an ERC claim when a business with those issues will very rarely meet the eligibility criteria.” The Sevillo court’s decision lines up directly with that enforcement stance.
Free Eligibility Check
See if you qualify for tax debt relief
Take 60 seconds to find out which IRS programs you may qualify for. No obligation, no cost.
Check Your Eligibility →How Courts Are Drawing the Line: A Comparison of ERC Outcomes
Not every ERC case has gone against taxpayers. Understanding where courts draw the line helps you assess where your own claim stands.
| Claim Type | Key Requirement | Court / IRS Outcome | Lesson |
|---|---|---|---|
| Indirect supply chain (port congestion) | Specific government order suspending supplier | Dismissed (Sevillo Fine Foods, D. Utah 2026) | Attenuated causal chain is fatal to the claim |
| Direct government order on employer | Mandatory order limiting commerce with more than nominal effect | Viable (may survive dismissal) | Must show operational impact of 10%+ reduction in capacity |
| Essential business, partial suspension | Government order causing meaningful operational change | Survived dismissal (Tri-State Memorial Hospital, E.D. Wash. 2026) | Cancelled procedures, reduced capacity, repurposed facilities can qualify |
| Gross receipts decline | Documented quarterly revenue drop vs. 2019 baseline | Separate, independent path to ERC eligibility | Must have contemporaneous financial records, not estimates |
| Supply chain, alternate supplier available | No qualifying suspension if alternate supplier existed | Denied (IRS GLAM AM 2023-005) | Higher cost alone does not equal a qualifying suspension |
Of the five scenarios reviewed by the IRS in its GLAM, only one scenario finds that the employer is eligible for an ERC under a supply chain disruption argument. The bar is extraordinarily high, and the Sevillo ruling confirms that federal courts are enforcing it.
If the IRS Is Auditing Your ERC Claim Right Now, Here Is What to Do
An audit notice or disallowance letter does not mean you have automatically lost. But your next steps matter enormously, and the window to respond is narrow. Here is a concrete action plan:
- Pull all your original documentation immediately. Gather the government orders you cited, your quarterly payroll records, financial statements from the qualifying periods, and any correspondence with the promoter or advisor who prepared your claim. Do not wait for the IRS to ask.
- Get your IRS transcript. Start by obtaining your IRS transcript, which will help you confirm that the IRS received your claim and whether you might have missed any correspondence from the IRS about it.
- Identify which eligibility path your claim used. Was your claim based on a government order (the Suspension Test) or a documented revenue decline (the Gross Receipts Test)? The evidence you need to defend each path is different, and a supply chain argument now carries serious legal risk after Sevillo.
- Respond to IRS notices on time. You have the right to protest audit results if you disagree, but there is usually a very strict time frame. Missing appeal deadlines can cost you your chance to appeal, which is why working with an experienced tax professional is critical.
- Understand your disallowance options. If the IRS has disallowed some or all of your claim, normally through IRS Letter 105-C, you have the option of protesting the IRS disallowance to IRS Appeals or suing for the refund in court.
- Consider withdrawal if your claim is shaky. You can submit a request to withdraw the full amount of your ERC claim even if you are under audit. This may help you avoid penalties if the claim was based on a now-discredited supply chain theory.
- Work with a qualified tax debt relief professional. The rules are complex, the deadlines are strict, and the stakes, including repayment demands plus interest and penalties, make professional representation worth every penny. Explore your tax debt relief options before making any decisions on your own.
Free Eligibility Check
See if you qualify for tax debt relief
Take 60 seconds to find out which IRS programs you may qualify for. No obligation, no cost.
Check Your Eligibility →The Bigger Picture: ERC Enforcement Is Intensifying
The Sevillo case is one data point in a much larger enforcement wave. The IRS is not stepping back from ERC scrutiny; it is doubling down.
According to the Government Accountability Office’s February 2026 report, the IRS had processed nearly 5 million ERC claims as of mid-2025, resulting in approximately $283 billion in reduced tax liabilities and refunds. With that much money in play, aggressive review was inevitable.
The One Big Beautiful Bill Act (OBBBA) extended the IRS’s audit window for ERC claims to six years, added new promoter penalties, and blocked refunds for certain late-filed claims. That means businesses that thought they were in the clear may still receive an audit notice well into the future.
Many businesses claimed the credit in good faith, only to find they may not have met the strict eligibility requirements. An improper ERC claim can trigger repayment, penalties, interest, and years of IRS scrutiny. If that sounds like your situation, seeking tax debt relief now is far better than waiting for a bill to land in your mailbox.
The good news: not every disallowance is the final word. A denied, stalled, or contested ERC claim does not mean the claim is wrong. The government sometimes advances aggressive interpretations that courts decline to adopt, and employers with legitimate claims may have more success than a notice of disallowance suggests. The key is knowing which category your claim falls into, and having the right team in your corner. See how tax debt relief professionals can help you respond to IRS action.
Frequently Asked Questions
What did the Sevillo Fine Foods court ruling decide?
In litigation over the Employee Retention Credit, the court rejected a specialty-food manufacturer’s contention that pandemic-related supply chain disruption constituted a qualifying suspension of operations. The court found that port congestion and multi-step causal chains between a government measure and a business’s actual operations are not enough to qualify for the ERC under the Suspension Test.
Does the Sevillo ruling mean all ERC supply chain claims are invalid?
Not necessarily. The ruling reinforces an already strict legal standard rather than creating a new one. An employer could claim the ERC for a supply chain disruption only if a government order applies to the employer’s own operations, or a government order applies to the employer’s supplier who is unable to fulfill the employer’s critical supply needs, and the employer is not able to compensate for the disruption by utilizing an alternate supplier. If your claim meets that precise standard with documented evidence, it may still be defensible.
What is IRS Notice 105-C and what should I do if I receive it?
Notice 105-C means the IRS has disallowed your Employee Retention Tax credit. This may happen after you receive Notice 6612 and go through an ERC audit, or the IRS may send you this notice if it decides to disallow your credit after reviewing your return. If you receive Notice 105-C, you will either need to send in a disagreement letter with supporting documents or deal with the fact that you have lost this valuable credit. Consulting a tax professional immediately is strongly recommended.
Can I still appeal if the IRS disallowed my ERC claim?
Yes. Once taxpayers receive a notice of disallowance, they can either accept the changes, submit a protest to the Independent Office of Appeals, or file a suit for refund. Protesting the Revenue Agent’s decision to the Office of Appeals requires a written statement with facts of your case, a statement of intent to appeal, and evidence supporting the ERC claim. Deadlines are strict, so act quickly and get professional help.
What happens if my ERC supply chain claim is found to be improper?
You may be able to submit a voluntary disclosure through the IRS’s Voluntary Disclosure Practice or submit amended returns to fix an ERC mistake. The Voluntary Disclosure Practice is for people who may have committed tax crimes. Taxpayers who made a mistake without intent to commit fraud can make a disclosure to the IRS by filing amended returns and voluntarily correcting their ERC. Acting proactively is almost always better than waiting for the IRS to come to you.
How long does the IRS have to audit my ERC claim?
The One Big Beautiful Bill Act (OBBBA) extended the statute of limitations for ERC claims from three years to six years, giving the IRS until at least 2027 to 2030 to audit most claims. This longer window means businesses that received ERC refunds years ago are not necessarily in the clear. Maintaining strong documentation and having a tax debt relief strategy in place is essential.