The Innovation Refunds lawsuit at the center of public attention is a class action filed in January 2024 by a former employee, Dakota Menaugh, in the U.S. District Court for the Southern District of Iowa. It alleges the West Des Moines company violated the federal WARN Act by cutting jobs without the required 60 days’ notice, and violated the Fair Labor Standards Act by miscalculating overtime pay. The layoffs followed an IRS moratorium on new Employee Retention Credit claims, which gutted the company’s business almost overnight.
What the Class Action Alleges
The complaint targets two distinct legal violations.
The first is a WARN Act claim. The federal Worker Adjustment and Retraining Notification Act generally requires employers to give 60 days’ advance notice before conducting mass layoffs. According to the complaint, Innovation Refunds employees were told their positions were being eliminated the next day, with no meaningful advance warning.1Louisiana Illuminator. Pandemic Business The suit says the company employed around 350 people at the time and notified at least 157 that their jobs were being cut.
The second claim involves overtime. The suit alleges Innovation Refunds failed to include nondiscretionary, performance-based bonuses when calculating employees’ overtime pay rates.2Des Moines Register. Suit Filed Against Des Moines Innovation Refunds Federal law generally requires regular performance bonuses to be factored into the overtime rate; leaving them out understates what workers are owed.
When the suit was filed, Allison Jackson, the company’s corporate communications director, told reporters that Innovation Refunds had “no knowledge of any pending lawsuits against the company.”2Des Moines Register. Suit Filed Against Des Moines Innovation Refunds The court had not decided class certification as of the most recent available reporting, and the case’s current status is not established in publicly available records reviewed for this article.
How the Layoffs Unfolded
The terminations were abrupt. Affected employees received Slack messages notifying them their jobs were ending, and their computer access was cut off immediately. Many were given 30 days of severance.3CNBC. How Innovation Refunds Cashed In on the Employee Retention Credit
The first wave, shortly after the IRS announcement in September 2023, eliminated more than 40% of the workforce. The company also halted its paid lead-generation advertising and cut 155 employees in that round.4Tax Notes. ERC Adviser Spends Over Half Million Lobbying Congress Cuts continued into 2024. In early February, another 36 employees were let go, leaving the headquarters workforce at 96. Later that month, 44 more workers were cut effective February 22, reducing the central Iowa workforce to 52 employees.5Des Moines Register. Innovation Refunds Cuts an Additional 44 Workers A company that had once employed nearly 1,000 people had shrunk to a skeleton crew in less than six months.
Why the Layoffs Happened
On September 14, 2023, the IRS announced a moratorium on processing new Employee Retention Credit claims, citing concerns about questionable claims and fraud across the industry.3CNBC. How Innovation Refunds Cashed In on the Employee Retention Credit Innovation Refunds’ revenue depended almost entirely on new ERC filings, and the effect on its business was immediate.
The credit itself was a pandemic-era refundable tax credit meant to help businesses that kept workers on payroll during COVID-19 disruptions. What Congress projected as a limited relief measure grew into a program costing more than $230 billion, more than triple initial estimates.6The Wall Street Journal. A Tax Lifeline Goes Bust3CNBC. How Innovation Refunds Cashed In on the Employee Retention Credit4Tax Notes. ERC Adviser Spends Over Half Million Lobbying Congress
The Business Model That Drew Scrutiny
Innovation Refunds operated as a middleman. It marketed to small businesses, collected their documentation, and outsourced eligibility determinations and tax return filing to independent tax attorneys. Its fee was 25% of the refund, collected only after the IRS paid the client.3CNBC. How Innovation Refunds Cashed In on the Employee Retention Credit
Former employees told CNBC the structure was designed to insulate the company from liability. Because Innovation Refunds did not sign the tax returns, the burden of any errors fell on the independent tax partners and the business owners who filed. The company marketed “audit protection” to clients but declined to explain what that protection covered when reporters asked.
Sales practices drew separate criticism. Former employees described aggressive tactics, persistent calling of recycled leads, and what some called “bullying” or “hounding” of business owners. Marketing emails carried subject lines like “Apply or Say Goodbye” and “Save your place in line.” Sales targets were described as unrealistically high, with internal memos offering a $100,000 bonus if the company hit 50,000 lifetime deals.
Much of the volume ran through the “limited commerce” eligibility test, a subjective criterion tied to whether government shutdown orders affected a business’s operations. Former employees said management encouraged aggressive positions on qualification under that method, including for businesses whose employees had been able to telework through shutdowns.
Other Cases Naming Innovation Refunds
Innovation Refunds has also been named as a defendant in bankruptcy adversary proceedings brought by trustees of former client companies.
In Fisher v. Innovation Refunds LLC, filed in Maryland Bankruptcy Court in December 2025 as part of the Canton & Company LLC bankruptcy, the plaintiff sought to recover $192,426.39 under preference and fraudulent transfer provisions. When Innovation Refunds failed to respond, the court entered a default judgment in March 2026. The parties then settled; the court vacated the default in April 2026, and the case closed on April 22, 2026.7PACER Monitor. Fisher v. Innovation Refunds LLC
In Lowey v. Innovation Refunds, LLC, filed in Massachusetts Bankruptcy Court in August 2025 in the CW Keller & Associates bankruptcy, the plaintiff raised similar preference and property claims. Innovation Refunds answered in March 2026, and the parties stipulated to dismissal in April 2026, closing the case on April 23, 2026.8PACER Monitor. Lowey v. Innovation Refunds, LLC
Both proceedings involved bankrupt companies seeking to claw back payments made to Innovation Refunds, likely fees the company had collected for ERC services before the client businesses failed.
No federal agency has publicly named Innovation Refunds as the target of a formal investigation. The IRS has said it is investigating both businesses that claimed the credit and the promotion companies that helped them, without naming specific firms.3CNBC. How Innovation Refunds Cashed In on the Employee Retention Credit The agency has noted that it retains authority to pursue fraud cases indefinitely, including against companies that have ceased operations.9Government Accountability Office. GAO-26-107456
Where Things Stand for Clients
Innovation Refunds is still in operation, but in drastically reduced form. Its website states the company is focused on guiding existing customers through the remainder of the refund process, tracking claims, handling IRS correspondence, and supporting clients through final payment. It is not accepting new ERC applications.10Innovation Refunds. Innovation Refunds – Home
For businesses that filed through the company, exposure did not end with the moratorium. By June 2025, the IRS had processed nearly 5 million ERC claims totaling roughly $283 billion in payments, and by December 2025 it had closed most outstanding claims. A law passed in July 2025 disallowed certain unpaid ERC claims filed after January 31, 2024.9Government Accountability Office. GAO-26-107456 The IRS has warned that businesses found to have submitted inaccurate claims may be required to return the money and pay penalties.3CNBC. How Innovation Refunds Cashed In on the Employee Retention Credit Features the IRS has flagged as warning signs for problematic ERC promoters, including unsolicited outreach, promises of a simplified application, and refund-percentage fees, describe how Innovation Refunds operated at its peak. A business that filed through the firm and now receives a disallowance or clawback notice should consult a tax professional independent of the original filer.