Compliance
Navigating Employee Retention Credit Disallowances: Timing & Relief Options
New IRS procedures help ERC claimants protect their legal rights by extending deadlines and issuing alerts when disallowances approach statute limits.
By NomadicTax Research Team • 6 min read • June 7, 2026
## Understanding the ERC Disallowance & Time Limits
The **Employee Retention Credit (ERC)** applies only to wages paid in 2020-21 and has been subject to tightened rules under the One, Big, Beautiful Bill (OBBB). Under section **70605(d)** of OBBB, for Q3 and Q4 of 2021, **no new ERC refunds or credits are allowed** if the claim was filed after **January 31, 2024**. Even if you're otherwise eligible, late filing subjects your claim to disallowance under this specific rule. ([irs.gov](https://www.irs.gov/newsroom/irs-frequently-asked-questions-faqs-address-employee-retention-credits-under-erc-compliance-provisions-of-the-one-big-beautiful-bill?utm_source=openai))
## What the IRS is doing
In April 2026, the IRS introduced a **streamlined process** for taxpayers whose ERC claims were disallowed (via **Letter 105-C**) and who fear they’ll miss the **two-year statute** for bringing a lawsuit or getting final refund resolution.
- The IRS will send **Notice CP-320B**, warning taxpayers when six months or less remain on their statute of limitations. The notice includes **Form 907**, which allows an agreement to **extend** the time someone has to file suit. ([taxpayeradvocate.irs.gov](https://www.taxpayeradvocate.irs.gov/news/nta-blog/protect-your-employee-retention-credit-claim/2026/04/?utm_source=openai))
- This helps protect legal standing in cases delayed by backlog or administrative processing.
## What you should do if your ERC claim is disallowed
- Review the **Letter 105-C** you receive. It will state reasons for disallowance.
- Collect your documentation: proof of wages, government orders, 2019 receipts if using a decline test, startup business documentation if applicable. ([irs.gov](https://www.irs.gov/coronavirus/understanding-letter-105-c-disallowance-of-the-employee-retention-credit?utm_source=openai))
- If offered Notice CP-320B, sign and file Form 907 – extension of time to bring suit.
- If not yet disallowed but believe disallowance is imminent, watch for similar notices, and consider early consultation with a tax professional.
## Examples
**Scenario A**: Bob owned a restaurant in 2021. He claimed ERC for Q4, filed an amended return on Dec 15, 2023. He gets Letter 105-C in May 2026 disallowing the credit because it was filed after Jan 31, 2024. Since Section 70605(d) prohibits the claim, Bob could appeal if he filed timely, but in this case, his filing date was late—so disallowance stands under law. ✘
**Scenario B**: Carol operated a shop and filed for ERC Q3 2021 claim on Jan 15, 2024. Case is disallowed via 105-C in April 2026. She receives CP-320B because she has under six months left to bring a suit (statute expires July 4, 2027). She completes Form 907, extends time, and proceeds with counsel to contest. ✓
## Actionable Tips for Practitioners & Businesses
- Always double-check filing dates when submitting ERC claims. A few weeks difference can trigger disallowance.
- Keep thorough and organized evidence: financials, orders, contracts.
- Respond quickly to Letter 105-C – don’t wait until final.
- Monitor for notices like CP-320B. Don’t mistakenly miss your chance to act.
## Final Thoughts
While the OBBB tightened rules significantly, new IRS procedures give late-filers or disallowed claims a chance to protect their rights. Time is critical; deadline missteps can mean losing refunds you’re owed. Stay informed, organize your evidence, and act early.