The IRS denied your Employee Retention Credit claim. Now what? The appeal process exists, but it does not work the way most business owners expect, and the procedural traps it contains have already cost some companies their entire claim.
If you received IRS Letter 105-C or Letter 106-C, understanding the ERC appeal process is critical. Businesses contesting an ERC denial should also review Cumberland Law Group’s ERC disallowance defense page, which explains the legal options available when the IRS rejects a claim.
The tax attorneys at Cumberland Law Group, with offices in Atlanta, GA and across North Carolina in Raleigh, Charlotte, and Durham, represent business owners dealing with ERC disallowances, IRS appeals, audit disputes, and federal tax controversy matters.
Here is a straightforward walk-through of how the ERC appeal process works in 2026, what documentation you need, and where the process tends to break down.
First: Understand What Kind of ERC Disallowance Letter You Have
The IRS uses two main disallowance letters for Employee Retention Credit claims:
- Letter 105-C: Full disallowance. The IRS has denied your entire ERC claim for the referenced tax period.
- Letter 106-C: Partial disallowance. The IRS has denied a portion of your ERC claim. The IRS issued guidance on responding to 106-C in April 2025, later than the December 2024 guidance for 105-C.
Both letters include the date of the decision, the tax period at issue, the stated reason for disallowance, your appeal rights, and the deadline by which you must file suit if you intend to challenge the denial in court.
Read the disallowance reason carefully before doing anything else. The IRS identifies specific grounds, whether the denial is based on eligibility, the wage calculation, the credit amount, or a timeliness issue. Your response needs to address the stated reason directly, not just submit a generic eligibility argument.
The IRS explains its current guidance for Letter 105-C ERC disallowances and Letter 106-C partial ERC disallowances on IRS.gov.
If your business received one of these letters and you are unsure what to do next, call Cumberland Law Group at (800) 960-5359 for a free consultation before you respond.
The 30-Day Window: What It Does and Does Not Do
Your disallowance letter gives you 30 days to respond. Responding within that window helps preserve your administrative appeal rights. Missing it does not eliminate all options, but it significantly complicates the path.
One thing the 30-day response does not do: it does not stop the two-year deadline that began running on the date of your disallowance letter. That two-year period is statutory. Filing a protest does not pause it. Filing an appeal does not pause it.
The IRS has been explicit that requesting an administrative appeal does not extend the two-year deadline to file suit. That matters because a business can be technically waiting for the IRS to review its protest while the deadline to preserve its refund rights continues running in the background.
The practical consequence is enormous. A business that filed a protest in summer 2024 and is still waiting for the IRS to complete its compliance review in 2026 may be approaching the end of its right to sue, even though it is still inside the administrative appeal process.
The National Taxpayer Advocate identified ERC processing delays and taxpayer rights issues as a serious problem for taxpayers.
Businesses facing a denied ERC claim often assume that filing a protest automatically protects their rights. Unfortunately, that is not always the case. Our attorneys discuss these risks in more detail on our ERC disallowance defense page.
What a Valid ERC Protest Must Include
The IRS issued specific guidance in December 2024 for Letter 105-C and April 2025 for Letter 106-C on what a protest must contain to be valid. A protest that fails to meet these requirements may not effectively preserve your appeal rights.
A complete ERC disallowance protest should include:
- Your name, address, and employer identification number
- A statement that you are protesting the disallowance
- The specific tax period covered by the disallowance
- A statement of facts supporting your position, written under penalty of perjury
- A statement of law or other authority supporting your position
- Documentation substantiating your eligibility
The documentation piece is where many businesses without professional help make critical errors. The IRS guidance specifies different documentation requirements depending on the grounds for disallowance.
| Disallowance Ground | Required Documentation |
|---|---|
| Business was not eligible in the stated quarter | Government orders affecting operations with specific dates, gross receipts for applicable quarters, and comparison periods from 2019. |
| Wages do not qualify | Payroll records, Form 941 for relevant quarters, and documentation of which employees were retained. |
| Credit amount exceeds the allowable limit | Recalculation showing qualified wages per employee, including PPP loan interaction if applicable. |
| Untimely filing | Proof of original mailing date, certified mail receipt, or other proof of timely submission. |
| Claim associated with an improper preparer | Independent documentation of eligibility separate from the preparer’s analysis. |
This is why the protest stage matters. A thin protest gives the IRS very little to evaluate. A documented protest gives the IRS, Appeals, and potentially a federal court a factual record to work from.
Received Letter 105-C or Letter 106-C? Call (800) 960-5359 for a free consultation with Cumberland Law Group before your response deadline passes.
What Happens After You Submit the Protest
Here is where the process diverges from what most people expect.
In a standard IRS audit, a protest is filed with the IRS Independent Office of Appeals, where an Appeals Officer reviews the case independently of the examining division. The taxpayer gets a hearing.
In the ERC disallowance context, the process has often worked differently. Because the IRS issued disallowances before conducting a full examination, many protested cases were routed to IRS Compliance for initial review rather than directly to Appeals.
Compliance then conducts the audit-like documentation review that should have happened before the disallowance was issued. Practitioners often refer to this as the “reverse audit” problem.
That compliance review takes time. Significant time. And while it runs, the two-year clock keeps ticking.
Some cases do eventually reach an Appeals officer. But the path is not guaranteed or linear. A protest submitted in 2024 may still be in compliance review in mid-2026, months away from the expiration of the right to file suit.
If your ERC claim is stuck in review, it may help to understand how the broader IRS audit process works, how documentation is evaluated, and why professional representation may be important before the agency narrows the record against you.
When to Use the New IRS Extension Process
On April 27, 2026, the IRS announced a new streamlined process for taxpayers caught in this gap: businesses that responded to their ERC disallowance notice and are still waiting for IRS resolution with six months or less remaining in their two-year window.
To use this process, two conditions must be met:
- You previously responded to your Letter 105-C or Letter 106-C.
- Six months or fewer remain before your two-year deadline.
If both are true, the IRS has created a mechanism to request additional time without immediately filing a federal lawsuit. The legal tool is Form 907, Agreement to Extend the Time to Bring Suit, which must be executed by written agreement before the two-year period expires.
The extension process is not automatic. It requires action. The IRS has also stated that the extension is not valid until the IRS signs it.
If you do not know how much time remains on your two-year deadline, the date is calculated from the date printed on your disallowance letter, not the date you received it.
Taxpayers approaching the end of the two-year period should strongly consider obtaining legal guidance. Depending on the facts, a Form 907 extension, administrative appeal strategy, or refund suit may be appropriate.
Learn more about ERC disallowance defense and legal options here.
If the ERC Appeal Fails: Federal Court
If the IRS Independent Office of Appeals does not rule in your favor, or if the administrative process does not resolve within the two-year period, the next step may be a refund suit.
These suits are generally filed in either:
- U.S. District Court in the federal district where the taxpayer is located. For Georgia businesses, this may be the Northern, Middle, or Southern District of Georgia. For North Carolina businesses, this may be the Eastern, Middle, or Western District of North Carolina.
- U.S. Court of Federal Claims in Washington, D.C., which has nationwide jurisdiction over federal tax refund suits.
In a refund suit, the taxpayer must prove eligibility by a preponderance of the evidence. The IRS risk-scoring model and the reasons stated in the disallowance letter may become part of the evidentiary record, along with whatever documentation the taxpayer presents.
Cases that went through a thorough administrative protest process arrive in federal court with a more developed factual record than those in which the protest was thin.
This is one reason representation at the protest stage matters. The earlier the record is built correctly, the stronger the taxpayer’s position may be if the case moves beyond the IRS and into court.
For related context, read Cumberland Law Group’s guide on how and when to appeal IRS tax assessments and collection actions.
The One Decision That Shapes Everything
The quality of the initial protest determines the strength of every subsequent step.
A protest that simply says “we disagree with the denial” gives the IRS almost nothing to work with and gives a federal court no factual foundation. A protest that documents, with specificity, the government orders that affected operations, the quarter-by-quarter gross receipts comparison, the payroll records, and the wage calculations gives the review process real material to evaluate.
The IRS is not going to build your case for you. The compliance review that follows a protest is not an investigation in your favor. It is a review of what you submitted.
The burden is on the taxpayer to demonstrate eligibility with documentation that matches the specific grounds for disallowance.
That is the case for representation at the protest stage, not after the appeal fails.
For business owners, this is also where a tax attorney differs from a CPA. ERC disallowance defense may involve administrative procedure, litigation deadlines, attorney-client privilege, and federal refund suit strategy, not just payroll calculations.
For a detailed overview of ERC disallowance defense, appeals, compliance review, Form 907 extensions, and federal refund litigation, visit Cumberland Law Group’s ERC disallowance defense page.
Schedule a Free Consultation with Cumberland Law Group
Cumberland Law Group represents business owners in Georgia and North Carolina contesting ERC disallowances, IRS appeals, audit disputes, and federal tax controversies.
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If your ERC claim was denied, do not assume the denial is final. But do not assume you have unlimited time either. The two-year deadline is real, and filing an administrative appeal does not stop it.
Call Cumberland Law Group at (800) 960-5359 for a free consultation, or submit your information online and we will call you back.
This post is for informational purposes only and does not constitute legal advice. Contact Cumberland Law Group directly for guidance specific to your situation.
