ERC claim disallowed (Letter 105-C): the response, the Appeals route, Form 907 and the two-year refund suit clock

What Letter 105-C is

Letter 105-C is the statutory notice of claim disallowance. For an ERC claim it tells the employer the IRS has disallowed the credit claimed on a Form 941-X, 943-X, 944-X or CT-1X, either as a refund or as a reduction of tax for the quarter. The IRS page describes its contents: the reason, the date of the decision, the tax period, appeal rights and the time within which suit must be filed to challenge the denial in court. Letter 106-C is the partial disallowance version, used when part of the Form 94X-X was allowed; IRM 21.5.3.4.6.1 adds that when a partial disallowance leaves a balance due or zero balance, the IRS sends a Letter 105-C instead. The general notice pages for Letter 105-C and Letter 106-C cover non-ERC claims.

Two consequences follow immediately. The employer can no longer use the claim withdrawal process for the periods in the letter, and the IRC 6532(a) period for a refund suit begins to run. The IRS confirms the first: “If you received Letter 105-C, you're not eligible for the claim withdrawal program for the tax periods covered in the letter.”

Why the IRS disallowed the claim

Most ERC disallowances were generated by filters rather than examinations. IRM 21.7.2.7.8 describes Forms 94X-X analyzed by Research, Applied Analytics and Statistics (RAAS) and released to Accounts Management with instructions to allow, disallow or partially disallow. The subsections list the filters, each with its own Letter 105-C paragraph:

Each filter is a presumption built from IRS data, which is why the response has to attack the specific reason stated: W-2s and payroll records for a no-W-2 letter, formation documents and first payroll for an establishment-date letter, the ownership chart and wage detail for a related-individual letter.

A second category of Letter 105-C is statutory rather than factual: claims for the third and fourth quarters of 2021 filed after January 31, 2024, which Public Law 119-21 bars. Those letters carry their own paragraph and are discussed below. The IRM notes that as of May 1, 2026 Accounts Management no longer sends cases to RAAS; unrisked processable claims go to Examination's classification queue (HQ Reserved 10 ERC LUQ) instead, so newer disallowances come with an exam determination behind them.

The two-year clock and Form 907

IRC 6532(a)(1) bars a refund suit begun “after the expiration of 2 years from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of the part of the claim to which the suit or proceeding relates.” Section 6532(a)(4) adds that any reconsideration by the IRS after the notice does not extend the period for suit. The IRS ERC page translates this: “Generally, you have two years from the date of Letter 105-C (your original claim disallowance) to file suit. Requesting an appeal doesn't extend this time.”

The IRM instruction to campus employees is blunt about the consequence. IRM 25.6.1.10.3.1.5: “The law does not allow the IRS to issue a refund once the limitation period has expired. This rule applies even if the taxpayer is correct and all parties agree that the refund should have been paid. There are no exceptions.” The same section tells employees not to reconsider a disallowed claim unless time remains in the two-year period or a timely suit is pending; if the period runs while the case sits in inventory, the claim cannot be allowed and is closed as a no-consideration. An Appeals officer's favorable decision in month 25 is worth nothing without a suit or an extension.

Form 907. IRC 6532(a)(2) lets the two-year period be extended by written agreement between the taxpayer and the IRS. The agreement is Form 907, Agreement to Extend the Time to Bring Suit (Rev. July 2026), which lists the periods, kind of tax, disallowance mailing date and amount, and sets a new expiration date. The form itself warns: “This agreement will not be effective until an authorized IRS employee signs this form on behalf of the Commissioner of Internal Revenue,” and “If the two-year period expires without an agreement, you lose your right to bring a refund suit, and the IRS cannot issue a refund.” A statement of the issues in the claims must accompany it.

For ERC cases the IRS announced a streamlined submission route in IR-2026-58 on April 27, 2026. If a response to the disallowance is pending and six months or less remain in the two-year period, the employer completes and signs Form 907 and uploads it through the Document Upload Tool, selecting notice CP320B from the menu, then waits for the countersigned copy. Notice CP320B was sent to employers the IRS identified as eligible, but the page says taxpayers may be eligible without having received CP320B. Where an Appeals officer is already assigned, the request goes to that officer. IRM 21.7.2.7.11 notes the account marker: a TC 971 AC 804 with CP320B 907 in the miscellaneous field, with the extended date shown once the statute is extended. The statute date calculator on this site computes the two-year date from the letter.

What to send in response

The IRS page asks for a response within 30 days to protect the two-year timeline for an appeal or suit, while acknowledging an appeal may be requested at any time within the two years. The package has three layers.

1. Answer the stated reason. Documentation rebutting the filter: W-2s and payroll registers for a no-W-2 letter; formation and first-payroll records for an establishment-date letter; for a WFTC timeliness letter, proof the claim was filed on or before January 31, 2024 (certified mail receipt, proof of mailing, postmark). The IRM instructs that a reply with no additional information and no indication of appeal is closed as a no-consideration, so a bare letter of disagreement accomplishes nothing.
2. Prove eligibility for each quarter. The IRS requires documentation of at least one of the three tests for each quarter disputed. Government order: a copy of each order with the provisions highlighted, a written explanation of how it fully or partially suspended operations, and business records showing the suspension (the page lists board minutes, emails to employees, letters to customers or vendors). The order must be a mandate, not a recommendation, guidance, statement or policy that did not mandate a suspension. Gross receipts: a written explanation of the computation including the aggregation analysis, and gross receipts records for every quarter of the claim year and the comparison year, with the warning that “Summary records will not be accepted.” Recovery startup business: proof the business began after February 15, 2020 and had average annual gross receipts of $1 million or less for the three preceding years.
3. Support the computation. A written explanation of entitlement, a description of the business, the worksheets used to compute the credit, and a statement that the computation excludes wages paid to related individuals, wages used for PPP forgiveness, and wages paid to employees providing services if the employer was a large eligible employer. If the original computation included any of these, a revised worksheet goes in alongside the original.
4. Add the procedural items. A Form 2848 if a representative is responding; a written request for Appeals that meets the protest requirements if the employer wants Appeals consideration should the campus not agree (see writing a formal protest); a copy of the Letter 105-C.

Send the response to the address or fax in the letter. IRM 21.7.2.7.11 treats every reply as a new case, so a complete, indexed package that can be worked by a designated Accounts Management employee without a follow-up request is the goal.

What the IRS does with the response

IRM 21.7.2.7.11 is written for the Accounts Management employees designated to process ERC disallowance replies, and its table decides the path:

Because nearly every letter-disallowed ERC claim was RAAS-risked, most substantive replies go to Examination for review. IRM 21.7.2.7.11.1 governs the return trip. Exam leaves a case note: Accepted - Allow in full Accepted - Allow in part (processed to Exam's figures with a Letter 106-C), or Routed to Appeals in which case Exam sends the file to Appeals directly and Accounts Management issues Letter 86-C with the text: “Your claim has been sent to the Independent Office of Appeals. Please allow 120 days for them to contact you regarding your claim.” If no appeal was requested and the information does not support the claim, the IRS sends Letter 3064-C asking for more or Letter 916-C saying the disallowance stands.

Appeals and the refund suit

Appeals considers the case under its normal procedures for claim disallowances, described in the Independent Office of Appeals and hazards of litigation. Two ERC-specific points. First, the two-year suit period keeps running during Appeals, and IRM 21.7.2.7.11 tells employees that an Appeals officer who has the case is the person to ask for a Form 907 extension. Second, the ERC page's monthly count shows roughly 1,500 ERC claims with Appeals as of the week ending October 3, 2026, against 5,400 awaiting review of disallowance responses, so the campus review step is where most cases sit.

The judicial route is a refund suit, not Tax Court. IRC 7422(a) requires that a claim for refund have been duly filed before suit (the Form 94X-X is that claim), and suit lies against the United States in the district court or the Court of Federal Claims. Section 6532(a)(1) also sets the earliest date: no suit before six months after the claim was filed unless the IRS has decided it, which a Letter 105-C does. Suit may be filed at any time in the two-year window whether or not an appeal is pending, and filing suit is the only step that preserves a refund if the window closes without a signed Form 907. The refund suits guide covers the choice of forum and the prerequisites.

The WFTC timeliness bar for late 2021 claims

Section 70605(d) of Public Law 119-21 (the Working Families Tax Cuts, signed July 4, 2025) “bars the IRS from allowing employee retention tax credits (ERTC) under IRC 3134, or issuing any refund with respect to such ERTCs, after the date of enactment, unless a claim for such credit or refund was filed on or before January 31, 2024” (IRM 21.7.2.7.12). IRC 3134 is the authority for wages paid after June 30, 2021, so the bar reaches third and fourth quarter 2021 claims only. The IRM's case criteria are Forms 941-X, 943-X, 944-X and CT-1X received after January 31, 2024, for the third or fourth quarter of 2021, claiming ERC. For those cases “The timeliness limitations of Section 70605(d) of WFTC legislation takes precedence over RAAS risking or prior exam determination.”

Timeliness is decided in steps (IRM 21.7.2.7.12.1): the IRS received date on or before January 31, 2024; if not, the grace-period rules of IRM 21.5.1.4.2.5; if not, the postmark date. The IRM's example: a claim received February 9, 2024 with a January 30, 2024 postmark is timely and the received date is corrected. Part of the determination table is redacted in the public IRM. An untimely claim is disallowed with a TC 290 for zero and a Letter 105-C with the dedicated paragraph; the letter text quoted on the IRS page cites section 70605(d) and the January 31, 2024 date.

Replies to a timeliness Letter 105-C are governed by IRM 21.7.2.7.12.2. Evidence that the claim was filed on or before January 31, 2024 sends the case back into normal ERC processing (to Exam classification if it was never risked, or along the RAAS path if it was). Information that does not establish timeliness is closed as a no-consideration. An appeal request with no proof of timeliness is sent to Appeals with the RAAS notes attached, and the case type is recorded as AM ERC Claim Timeliness, merits considered or merits not considered so Appeals knows whether eligibility was ever reviewed. For a practitioner the only responsive document is proof of filing before the date; eligibility evidence does not cure a timeliness disallowance.

The income tax side after a disallowance

An employer that reduced its wage deduction for the year of the credit, as Notice 2021-20 required, is left without that deduction if the credit is disallowed. The IRS FAQ (updated March 20, 2025) allows a simple fix: “in the year your claim disallowance is final (meaning you are not contesting the disallowance or you have exhausted your remedies to argue against the disallowance), increase your wage expense on your income tax return by the same amount that it was reduced when you made your claim.” Alternatively the employer may amend the original year, file an AAR, or file a protective claim. While the disallowance is contested the deduction stays suspended, and IRM 25.6.1.9.5.10 notes the extended ERC assessment statute “may also affect related income tax returns when wages are adjusted due to the denial of an Employee Retention Credit.”

Questions practitioners ask