Compliance
How Businesses Can Handle ERC Disallowance Efficiently
New IRS rules offer better ways for businesses to extend deadlines and resolve disputes when an Employee Retention Credit claim is disallowed.
By NomadicTax Research Team • 5-8 min read • May 17, 2026
## What Happened With ERC Disallowances?
Under current IRS rules, businesses that had COVID-era **Employee Retention Credit (ERC)** claims disallowed receive a **Letter 105-C or 106-C**. Traditionally, they had **two years** from the date on that letter to **resolve via appeal or file suit** in Federal court. However, there was an issue: appealing doesn’t extend that two-year limit, risking loss of ability to get refunds even if you win later in appeals. ([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: Form 907 Extension Agreement
IR-2026-58 (April 27, 2026) introduces a **streamlined option**: businesses now can use **Form 907, Agreement to Extend the Time to Bring Suit**, to extend that statutory two-year period **before it expires**—protecting the ability to receive a refund or credit, even if appeals take longer. Important qualifiers:
- You must have received Letter 105-C or 106-C disallowing your claim. ([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))
- You must act **before the two-year deadline** (from the letter date) to extend with Form 907. ([irs.gov](https://www.irs.gov/coronavirus/understanding-letter-105-c-disallowance-of-the-employee-retention-credit?utm_source=openai))
- If six months or less remain, this becomes especially crucial. ([irs.gov](https://www.irs.gov/coronavirus/understanding-letter-105-c-disallowance-of-the-employee-retention-credit?utm_source=openai))
## Steps for Businesses to Follow
1. **Identify the Letter Date**: Determine when you received Letter 105-C or 106-C and calculate when the two-year period ends.
2. **Submit Form 907 Before Deadline**: Download and complete the agreement, send in via Document Upload Tool, choosing notice ‘CP320B’ where applicable. Wait for IRS countersignature—extension isn’t active until signed. ([irs.gov](https://www.irs.gov/coronavirus/understanding-letter-105-c-disallowance-of-the-employee-retention-credit?utm_source=openai))
3. **Continue Appeals if Desired**: You may still pursue administrative appeals with the IRS Independent Office of Appeals. The extension does **not waive** the ability to do so.
4. **Preserve Records & Communication**: Keep copies of all correspondence, appeals documents, and IRS decisions.
## Example Scenario
*Business X* claimed ERC for Quarter 2, 2021. IRS disallowed via Letter 105-C dated **May 1, 2024**. The two-year deadline to file suit is **May 1, 2026**. On **April 1, 2026**, Business X submits Form 907 to extend the period before it expires. If the IRS signs it, Business X retains ability to sue or continue the process even after May 1, pending the IRS response or court filing. Without it, claims are forfeited.
## Practical Tips and Risks
- **Don’t wait**—processing time for extension means earlier submission gives more buffer.
- **Check eligibility**—you must be eligible for appeal or filing suit, and submit Form 907 **before** the two-year deadline.
- **Legal help** often useful for interpreting the letter and understanding the disallowed cause.
- **Note statute limitations**: once time expires, remedies may be lost even if IRS later agrees you were correct.
## Why It Matters
This rule prevents situations where taxpayers lose out simply due to process timing. It gives businesses a clearer path to protect their rights, avoid litigation under tight deadlines, and potentially recover refunds they’re entitled to. Especially important for those whose ERC claims were disallowed more recently or whose appeals are still pending.
## Conclusion
If your ERC claim was disallowed, don't wait. Assess your timeline, and if you’re within two years, use Form 907 to extend the deadline. You may also need to amend returns, respond to IRS letters, or gather documentation. With proper action, you can safeguard your ability to receive a refund or credit, even amid disallowed claims.