Compliance
Compliance Guide: Resolving ERC Disallowances and Avoiding Litigation
New procedures allow more time to settle Employee Retention Credit disputes before entering litigation—smart compliance steps to protect your rights and refunds.
By NomadicTax Research Team • 5-8 min read • May 10, 2026
## Overview of ERC Disallowance and the Two-Year Rule
The Employee Retention Credit (ERC) helped businesses offset payroll costs during the pandemic. When the IRS disallows an ERC claim, it issues *Letter 105-C* (fully disallowed) or *Letter 106-C* (partially disallowed). Under current law, recipients generally have **two years** from the date of that letter to resolve the claim with IRS or Appeals—and if necessary, file a lawsuit. If this deadline passes, refund relief won’t be available, even if the claim would later succeed. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-new-option-for-certain-taxpayers-to-request-more-time-after-erc-claim-disallowance?utm_source=openai))
## What’s New in the April 27, 2026 Announcement
The IRS now offers a **streamlined way** to request an extension of time for taxpayers who are:
- waiting for IRS to evaluate their response to Letter 105-C or 106-C, **and**
- have **six months or less** remaining before the two-year deadline expires.
Eligible taxpayers may now submit **Form 907, Agreement to Extend the Time to Bring Suit**, via the Document Upload Tool on IRS.gov (selecting notice CP320B). If approved, this extends the administrative resolution period and time to file suit. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-new-option-for-certain-taxpayers-to-request-more-time-after-erc-claim-disallowance?utm_source=openai))
## Compliance Steps & Best Practices
- **Tick down your calendar**: Track issuance date of Letter 105-C or 106-C carefully. Once there are six months or fewer left in your statutory period, act.
- **Check for eligibility**: Confirm that you're still waiting for IRS action on your response to the disallowance. If you do not meet both conditions, this streamlined process is unavailable—you may need to use standard procedures.
- **Use the Document Upload Tool**: Access IRS.gov/DUTReply and select *notice CP320B* to upload your Form 907. Ensure both parties sign the form properly—taxpayer (or their representative) and IRS if counter-signed.
- **Keep proper documentation**: Save dated copies of your response to 105-C/106-C, proof of submission, approvals or correspondence acknowledging the extension. These will be vital if litigation ensues.
- **Consult counsel in complex cases**: Particularly for partially disallowed claims, or where documentation is contested.
## Sample Scenario
A small business (Acme Co.) receives *Letter 105-C* on *September 1, 2024* indicating full disallowance of its ERC claim. The two-year deadline is September 1, 2026. By **March 1, 2026** (six months before deadline), Acme Co. submits its response and is still waiting for IRS feedback. On **April 30, 2026**, Acme files **Form 907** via the DUTReply tool selecting notice *CP320B* to extend the period. The IRS signs and returns it—Acme now has additional time both to get the IRS Appeals Office’s decision and to bring suit if needed.
## Risks and Considerations
- Missing the six-month threshold disqualifies the fast track. Late filings won’t trigger extension under this process.
- Filing a suit prematurely—before exhausting administrative options—could risk forfeiting rights or complicating matters.
- Extensions delay resolution but don’t stop interest or penalties if applicable depending on the case.
- Keep track of IRS notices. CP320B will be sent to eligible taxpayers, but you may not receive the notice and still be eligible—people in this case must verify eligibility independently. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-new-option-for-certain-taxpayers-to-request-more-time-after-erc-claim-disallowance?utm_source=openai))
## Action Plan Checklist
- [ ] Review your ERC claim status and dates.
- [ ] Assess whether you're within six months of the two-year deadline.
- [ ] If eligible, complete and sign Form 907.
- [ ] Submit through Document Upload Tool (notice CP320B).
- [ ] Retain evidence of submission and IRS’s counter-signing or acknowledgment.
- [ ] Monitor progress through IRS or Appeals and prepare for possible litigation.
## Conclusion
The IRS’s new streamlined extension process provides critical latitude to those navigating ERC disallowances—but only if you know the timeline and act early. Careful tracking, precise eligibility, prompt submission of Form 907, and good record-keeping are essential to protect your rights and preserve your chance at a refund.