Employee Retention Credit

How to Appeal an ERC Disallowance (2026): Your Options After the IRS Denies Your Employee Retention Credit

By Angeline Balsitis, EA · Reviewed by Melissa Ly, Chief Tax Officer · Updated July 5, 2026 · Editorial Standards

You waited many months for the Employee Retention Credit your business claimed, and instead of a check you got a letter — a Letter 105-C or 106-C saying the IRS denied it, in full or in part. It feels final. It is not. A disallowance is the start of a dispute you still have real power to win, not the end of one.

There are exactly two ways to fight back, and picking between them turns on one number and one date. Below, the highlighted boxes on the annotated Letter 105-C show exactly which line carries the mailing date that starts your clock — most business owners read the wrong one and lose months they didn't know they had.

This guide walks the whole map: the protest to IRS Appeals, the refund suit and which of the two courts to choose, the deadlines that actually control your case, and the honest line between what you can do yourself and when experienced representation changes the outcome.

Why the IRS disallowed your ERC claim

An ERC disallowance means the IRS reviewed your amended payroll returns and concluded your business did not qualify for the credit it claimed. The reason is stated on your letter, and it almost always falls into one of a handful of categories the agency has been applying to the ERC backlog.

The most common grounds are: no qualifying government shutdown order that actually suspended your operations; a decline in gross receipts that didn't meet the threshold for the quarter; wages that were already used for PPP forgiveness (no double-dipping); the business didn't exist or have employees in the claimed period; or "supply chain" theories the IRS has rejected as too broad.

If you received a CP320B notice that your ERC claim is under review earlier, or went through a full ERC audit, the disallowance is the outcome of that process. The key point for your appeal: you must rebut the specific reason on your letter — a general argument that "we qualified" does not move a case.

Full versus partial matters too. A Letter 105-C is a full disallowance; a Letter 106-C is a partial disallowance where the IRS allowed some of the credit and denied the rest. Both start the same 2-year clock for the denied amount.

What happens if you do nothing after a 105-C or 106-C

If you take no action, the disallowance becomes final and the money is simply gone — there is no automatic second look. Unlike a balance-due notice, an ERC denial doesn't escalate into levies; it escalates into a permanently closed door. Here is the sequence:

1. Day 0 — Letter 105-C or 106-C mailed. Your 2-year statute to sue begins on this date.
2. ~30 days — the letter's requested response window. The IRS asks you to reply if you disagree. Missing this does not end your rights, but it delays everything and can forfeit the cheaper administrative appeal.
3. Months 1–24 — the window to act. You can protest to Appeals and/or prepare a refund suit. Interest on any valid credit generally continues to run in your favor, but proof gets harder to assemble as time passes.
4. Day 730 (2 years) — the statute closes. Unless you filed suit or signed a Form 907, your right to recover the denied ERC is gone for good.

In 2026 this is more dangerous than it sounds. The IRS workforce shrank roughly 27% in 2025, so Appeals cases move slowly — and a slow appeal can quietly eat your entire two-year suit window if no one is watching the calendar. The date on your letter is the single most important thing on it.

Your two paths to challenge an ERC disallowance

There are two ways to contest an ERC denial: an administrative appeal inside the IRS, or a refund lawsuit in federal court. Most businesses start with the appeal because it is far cheaper, and only litigate if the appeal fails or time is short.

Path 1: Appeal to the IRS Independent Office of Appeals

An administrative appeal asks a separate IRS office — one not involved in denying your claim — to take a fresh look. It is the lowest-cost way to reverse an ERC disallowance and the natural first move for most businesses.

You start by filing a protest in response to the disallowance letter. The form of the protest depends on how much is in dispute:

• Small case request: if the disallowed amount for the tax period is $25,000 or less, you can use the short Form 12203, Request for Appeals Review — a brief statement of what you disagree with and why.
• Formal written protest: if the amount exceeds $25,000, you need a full written protest that lists the periods, the findings you dispute, the facts, the law, and your argument — signed under penalties of perjury.

A strong ERC protest does one thing well: it answers the exact reason on your letter with documents. If the IRS said no qualifying order suspended your business, attach the specific state or local order, the dates, and how it affected your operations. If it questioned your gross-receipts decline, attach the quarter-by-quarter figures. Appeals officers weigh the "hazards of litigation" — how likely the IRS is to lose in court — so evidence that would win at trial is what moves them.

The critical warning bears repeating: going to Appeals does not stop the 2-year clock to sue. If your appeal is still open as the two-year mark nears, you must either get the IRS to sign a Form 907 or file suit to keep your rights alive.

Path 2: Refund suit in district court or the Court of Federal Claims

A refund suit is a lawsuit that asks a federal court to order the IRS to pay the ERC it denied. Under IRC §7422 you can file once your claim is disallowed, or once six months have passed since you filed the claim with no decision. Your original Form 941-X is the refund claim that unlocks this right.

Before suing, two conditions must be met. First, you must have filed a valid administrative claim — the 941-X. Second, the full-payment rule generally requires that the tax at issue be paid; with ERC, the employment taxes for those quarters were already paid through payroll, so the credit is a claimed refund of an existing overpayment, which usually satisfies the rule. You then choose one of two courts.

The choice between courts is strategic, not cosmetic. A jury may help on sympathetic facts; the Court of Federal Claims offers a bench experienced in money claims against the government and a single controlling appeals court. Because the Department of Justice — not the IRS — defends refund suits, this stage is genuine litigation, and representation is effectively required to do it well.

The deadlines that actually control your ERC appeal

One deadline outranks all others: the 2-year statute to file a refund suit under IRC §6532, measured from the date the IRS mailed your disallowance letter. Everything else is a milestone; this is the wall.

Read those together and the trap is obvious: you can do everything right at Appeals, wait patiently, and still lose if the two-year statute expires while your case sits in a queue. Track the disallowance date, not the appeal status.

How Form 907 protects your right to sue

Form 907 is a written agreement between you and the IRS that extends the 2-year deadline to file a refund suit. It exists precisely because appeals can outlast the statute. If the IRS is still considering your ERC and the clock is nearly out, a signed Form 907 buys time without forcing you into court prematurely.

It is not automatic and it cuts both ways — the IRS must agree to sign it, and you should never let the two-year date pass on the assumption one will be granted. The safe rule: as the statute approaches, either secure the signed extension or file suit. Our full breakdown of Form 907 and when to sign it covers the mechanics and the risks in detail.

A worked example: what an ERC appeal decision looks like

This is a hypothetical to show the arithmetic and the choices — not a client story or a predicted result.

Say your restaurant claimed $180,000 in ERC across four 2020–2021 quarters, and the IRS disallowed the whole amount in a Letter 105-C mailed March 2, 2026, saying no government order suspended operations. Your 2-year clock now runs to March 2, 2028.

Because the disputed amount is far above $25,000, a small case request won't do — you file a formal written protest attaching the county dine-in closure orders, the exact dates your dining room was shut, and the payroll behind the credit. Appeals opens the case.

By late 2027 Appeals still hasn't ruled. With roughly three months left on the statute, you face a fork: get the IRS to sign a Form 907 to extend the suit deadline, or file a refund suit now to preserve the claim. If Appeals won't extend, you file in your U.S. District Court (jury available) or the Court of Federal Claims before March 2, 2028. Miss that date with no Form 907, and the entire $180,000 is unrecoverable — regardless of how strong the shutdown orders were. The math never changes; the calendar decides whether you ever get to argue it.

How to respond to an ERC disallowance, step by step

1. Find the disallowance date — the mailing date on your Letter 105-C or 106-C. Write your 2-year suit deadline on the letter itself.
2. Read exactly what was disallowed and why — which quarters, which grounds. Your response must answer that reason specifically.
3. Choose your path — a protest to IRS Appeals (cheaper first step) or a refund suit (when Appeals fails or the clock is short).
4. File the right document on time — Form 12203 for $25,000 or less, a formal written protest above that, or a court complaint for a suit.
5. Protect the 2-year statute — if Appeals is still open near the two-year mark, sign a Form 907 or file suit to preserve your rights.
6. Assemble your proof — the government order or gross-receipts records that prove eligibility, plus the payroll figures behind the credit.

If your denial spans multiple quarters or the disputed amount runs into six figures, have an experienced tax professional review your options before you file anything — the path you choose is hard to reverse.

When you can handle this yourself — and when you shouldn't

Not every ERC disallowance needs a lawyer. If your case is small and the facts are clean, a well-documented protest is something a capable business owner or their CPA can prepare and win.

You can likely handle it yourself when: the disallowed amount is $25,000 or less (a Form 12203 small case request), the IRS's stated reason is a simple factual error you can prove with one or two documents, and you're comfortable writing a clear, evidence-first response before the deadline.

Experienced representation changes the outcome when the stakes or complexity rise:

• The disputed amount is large — six figures across multiple quarters, where a formal written protest and litigation posture matter.
• The two-year statute is close — someone must manage the Form 907 decision and the suit filing without missing the date.
• You're heading to court — a refund suit is litigation against the DOJ Tax Division; it is not a do-it-yourself project.
• The legal theory is contested — supply-chain arguments, partial-suspension analysis, and gross-receipts aggregation rules are where cases are won or lost.
• Your ERC promoter is gone — if the firm that filed your claim has vanished, you need an independent professional to rebuild the file.

Honesty matters here: no one can promise a reversal, and eligibility turns on your specific facts. But on a large or time-pressured claim, the difference between a general response and a targeted, document-backed one is often the difference between recovering the credit and losing it.

Terms on your ERC letter, decoded

• Letter 105-C — a full disallowance of your ERC claim for the period; it starts the 2-year suit clock.
• Letter 106-C — a partial disallowance; the IRS allowed some credit and denied the rest.
• Protest — the written request that sends your case to the IRS Independent Office of Appeals.
• Refund suit (IRC §7422) — a lawsuit in federal court to recover a denied refund after your claim was disallowed.
• Statute of limitations (IRC §6532) — the 2-year deadline, from the disallowance date, to file that suit.
• Form 907 — the agreement that extends the 2-year deadline to sue when both you and the IRS sign it.

ERC disallowance appeal questions, answered

Your next 24 hours

1. Find the mailing date on your Letter 105-C or 106-C and count two years forward — write that suit deadline on the letter and your calendar.
2. Gather your proof — the Form 941-X you filed, the government shutdown order or gross-receipts records, and the payroll behind the credit.
3. Get a free case review — before you file a protest or run out the clock, use the 2-minute form or call (888) 825-7779 and we'll map your appeal vs. refund-suit options against your real deadline.

This guide is general information, not tax or legal advice for your specific situation. Eligibility for IRS programs depends on individual facts and circumstances; no outcome is guaranteed.

Related guides: Form 12203 Appeal Request: How the Small-Case Appeal Works · How Far Back Can the IRS Audit? The 3-Year, 6-Year, and No-Limit Rules · IRS Audit No Receipts: What to Do in 2025 · IRS Audit Reconsideration: How to Reopen an Audit · IRS CAP Appeal (Collection): How It Works, Deadlines, and How to File in 2026

Authoritative sources: IRS — Employee Retention Credit · IRS Independent Office of Appeals · Taxpayer Advocate Service.