What the letter means
IRM 21.5.3.4.6.1: “Letter 106C, Claim Partially Disallowed, is used for partially disallowed claims except Letter 105C is used if partially disallowing a claim results in a balance due or zero-balance.” The test is the result on the account after the adjustment. If the allowed part of the claim still leaves a refund, the client gets a 106-C and the refund. If the allowed part only reduces a balance, or the claim was an amended return that increased tax while claiming a credit that was denied, the client gets a 105-C even though part of the request was accepted. The IRM gives that example: an amended return reporting a tax increase and a credit increase where the credit is not allowed “is considered a partial disallowance” and “The adjustment will create a balance due.”
Like the 105-C, the 106-C must give the specific reason and the claim amount, is sent certified or registered mail, and must be reviewed by a lead or manager within two business days before it goes out. IRM 21.5.3.4.6.1 notes one difference in assembly: “For Letter 106C appeal rights are automatically included,” while the 105-C requires the examiner to select the rights paragraphs. The right-to-sue language depends on whether the request was for a refund or for abatement of unpaid tax.
Why the client got it
A partial disallowance arises when a claim has more than one item, or one item with more than one component, and the reviewer accepts some and rejects the rest. Typical patterns: an amended return claiming several credits where one lacks documentation; a Form 843 penalty claim where First Time Abate covers one period but not others; a claim where part of the amount falls outside the IRC 6511 lookback and part inside; an ERC claim where some quarters qualify and others do not; or an Examination Classification review (CAT-A) that directs the campus to “disallow an issue in full or in part” (IRM 21.5.3.4.6).
Mechanically, IRM 21.5.3.4.6.1 has the adjuster input the tax change for the allowed portion with the applicable reason code and, when a refund results, “use a hold code 3 and send the taxpayer a Letter 106C stating the changes.” The 106-C is therefore the explanation of the adjustment the client receives. If a RIVO freeze or marker is holding the original refund, the IRM has the adjuster use a hold code 4 instead so no refund releases until RIVO acts.
The two-year clock on the denied part
| Question | Answer | Source |
|---|---|---|
| What starts the clock | Mailing of the notice of disallowance by certified or registered mail | IRC 6532(a)(1) |
| What it covers | Suit on “the part of the claim to which the suit or proceeding relates” | IRC 6532(a)(1) |
| Does reconsideration extend it | No | IRC 6532(a)(4); IRM 21.5.3.4.6.2 |
| Can it be extended | Yes, in writing, on Form 907 | IRC 6532(a)(2) |
| After it runs | No suit; no refund of the denied part even if the IRS later agrees | IRC 6514(a)(2); IRM 21.5.3.4.6 |
IRC 6532(a)(1) ties the two years to “a notice of the disallowance of the part of the claim to which the suit or proceeding relates.” On a 106-C that is the denied portion; the allowed portion has been paid and needs no suit. The IRM instruction to employees applies equally to both letters: “Employees must refer to IRC 6532,” the period begins when the IRS sends the notice or receives a Form 2297 waiver, and “Any reconsideration by the IRS does not extend the time for bringing suit.” The TAS page frames the two years as the time to “request the IRS to reconsider the claim, request an appeal, or file suit,” and adds that a refund issued after the period “is considered erroneous and subject to repayment” unless a timely suit was filed or a Form 907 signed.
A second period runs if the client disagrees with the way the allowed part was computed. If the adjustment created a different refund than expected, the recourse is a new claim within the IRC 6511 period for that year, not a response to the 106-C.
One claim, one clock. When a 106-C disallows several items on one amended return, the two years run from the same mailing date for every denied item. If the client plans to appeal only some of them, make sure the ones left behind are either conceded or covered by the same Form 907.
How to respond
- Reconcile the allowed amount. Match the refund or credit to the account transcript (the TC 29X adjustment and the TC 846 refund or an offset) and confirm the right periods were adjusted. See reading an account transcript.
- Isolate the denied items and the stated reasons. IRC 6402(l) and IRM 21.5.3.4.6.1 require the specific reason and amount; a statute-based denial must state the received date and the date the claim should have been filed.
- Decide item by item: concede, supply what was missing, or appeal. For items the reviewer lacked documents for, resubmit with the documents; IRM 21.5.3.4.6.2 says new information that supports the claim is allowed through normal adjustment procedures, and if it does not, the IRS sends a no-consideration letter rather than another disallowance. The two years keep running either way.
- To appeal, send a written protest to the issuing office by the date in the letter: a small case request at $25,000 or less, otherwise a formal protest. State that the appeal is limited to the disallowed portion so the allowed refund is not reopened.
- Calendar two years from the letter date and request Form 907 if Appeals or reconsideration will run near it. IRM 21.5.3.4.6.2: if the period has expired and there is no Form 907 in the file, “appeals cannot consider the case.”
- If the denied items are worth litigating and time is short, file a refund suit on those items in the U.S. District Court or the Court of Federal Claims; see refund suits and claims. A partially disallowed claim satisfies the IRC 7422(a) requirement that a claim precede the suit.
What the IRS does next
The allowed portion is already adjusted when the letter issues; the refund follows unless another freeze holds it. A response to the 106-C is “treated as a new case” under IRM 21.5.3.4.6.2. The same chart governs both letters: the same claim with nothing new is reviewed for correctness and closed as a no consideration if the disallowance stands; new information is allowed or answered with a Letter 916C explaining what is still needed; a statement requesting an appeal is packaged (original claim, return, disallowance letter, appeal statement) and sent to Appeals electronically through the campus Appeals coordinator, with the IRM noting Appeals “typically contacts taxpayers within 120 days of receipt.”
After the two years, IRM 21.5.3.4.6 directs: “If the time to file a lawsuit has expired, do not consider the claim,” and the 916C text tells the taxpayer: “For more information, please refer to your original disallowance notice.” The allowed portion is unaffected; only the denied portion is lost.
Related notices
- Letter 105-C: full disallowance, or partial disallowance that leaves a balance due.
- CP22A: the adjustment notice that would have issued but for the hold code on a 106-C.
- CP12: a math error refund change, which is not a claim disallowance.
Questions practitioners ask
Why did the client get a 105-C when part of the claim was allowed?
Because the allowed part did not produce a refund. IRM 21.5.3.4.6.1 uses the 105-C whenever a partial disallowance results in a balance due or a zero balance; the 106-C is reserved for partial disallowances that still refund.
Does appealing the denied part put the allowed refund at risk?
The appeal is of the disallowed portion. State that scope in the protest. Appeals reviews the issue appealed; the allowed adjustment is already posted and is not reopened by the appeal itself.
Does the two-year clock run on the whole claim?
It runs on the disallowed part. IRC 6532(a)(1) ties the period to the notice of disallowance of the part of the claim the suit relates to. The allowed part has been refunded and needs no suit.
The refund did not arrive with the letter. Why?
The allowed portion is adjusted when the letter issues and the refund follows the normal cycle unless a RIVO or other freeze is on the account; the IRM uses a hold code 4 on those accounts so nothing refunds until RIVO acts. Check the transcript for a TC 846 or an offset.
Can we resubmit the denied items with better documentation instead of appealing?
Yes. IRM 21.5.3.4.6.2 allows the claim if the new information supports it. If it does not, the IRS sends a no-consideration letter, not a new 106-C, and the original two-year period keeps running.
Is a Form 907 needed if we are in Appeals?
If the two years will expire before Appeals finishes, yes. The IRM says Appeals cannot consider a case once the IRC 6532 period has expired without a Form 907 in the file.