The IRS has announced a new process to help taxpayers who are disputing their disallowed Employee Retention Credit claims to request more time before their rights to a refund or to seek judicial review are gone.
The ERC is a refundable tax credit that was enacted during the height of the COVID-19 pandemic to encourage businesses to keep their employees on payroll. However, the program became inundated with fraud—much of which the IRS has blamed on aggressive marketing tactics and misleading claims by so-called ERC mills, which encouraged ineligible businesses to apply for the credit.
When an ERC claim is disallowed by the IRS, a taxpayer will receive a Letter 105-C or 106-C. The taxpayer then has two years from the date of that letter to resolve their claim administratively or to file a refund suit in federal court if they disagree with the IRS’s decision. The taxpayer can protest the agency’s disallowance of their ERC claim with the IRS Independent Office of Appeals, but that doesn’t extend this statutory two-year deadline.
After the two-year period ends, the IRS says it can’t issue a refund, even if the agency later rules in the taxpayer’s favor after reviewing the disallowance. The deadline varies depending on the date of the original 105-C or 106-C letter.
The IRS said April 27 that taxpayers whose two-year periods are about to expire can now request more time to resolve their claims administratively or to file suit by completing Form 907, Agreement to Extend the Time to Bring Suit, if both of the following conditions are met:
- The taxpayer is waiting for the IRS to consider their response to the notice of disallowance on Letter 105-C or 106-C, and
- The taxpayer has six months or less remaining before their two-year period expires.
Under current law, the IRS and a taxpayer can agree in writing to extend the time to file suit, if both parties sign Form 907 before the two-year period expires. A fully executed Form 907 gives the IRS more time to consider the disallowance administratively and gives the taxpayer more time to file suit, if needed, the agency said.
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Starting Monday, taxpayers with six months or less remaining in their time to file suit, and who are waiting for the IRS to consider their disallowance response to Letter 105-C or 106-C, may submit Form 907 requesting an extension via the IRS Document Upload Tool by going to IRS.gov/DUTReply and selecting notice “CP320B” from the drop-down menu.
Properly executed Forms 907 will be given due consideration by the IRS, and taxpayers will be informed in writing whether the agency has agreed to the extension, an April 27 media release says. Countersigned Forms 907 will be sent to taxpayers or their authorized representative. The IRS states that it won’t consider Forms 907 submitted for disallowances unrelated to Letters 105-C or 106-C. Taxpayers should submit these requests through the IRS’s normal processes.
If corrections to a submitted Form 907 are required, or the taxpayer doesn’t otherwise qualify (i.e., there are more than six months remaining on the two-year statute), the IRS will notify the taxpayer by sending a Letter 3064C explaining how to perfect the Form 907 or why they don’t otherwise qualify, National Taxpayer Advocate Erin Collins wrote in a blog post on April 27.
Taxpayers identified as eligible for this new Form 907 submission method will be sent Notice CP320B, the IRS said. Collins noted that the IRS plans to issue CP320Bs on a rolling basis as the agency works through the backlog of ERC-related responses.
“This is a meaningful improvement and reflects the importance of protecting taxpayers’ statutory rights,” she wrote.
Step-by-step instructions are available at IRS.gov/CP320B.
Taxpayers may be eligible to extend the time even if they don’t receive Notice CP320B. Step-by-step instructions are available at IRS.gov/erc105c and IRS.gov/erc106c for those who believe they meet the above-stated criteria, even if they didn’t receive a letter.
The IRS said taxpayers who received an ERC claim disallowance notice and are unsure of their deadline should review the following information provided on IRS.gov: “Understanding Letter 105-C, Disallowance of the Employee Retention Credit,” or Letter 106-C, Claim Partially Disallowed. Those with additional questions should call the phone number listed on their most recent IRS notice, the agency stated.
Collins calls the new process for ERC claims “a step in the right direction” toward protecting taxpayer rights, but it also highlights a broader issue.
“The two-year deadline under IRC § 6532(a) is unforgiving, and too many taxpayers, practitioners, and IRS employees are unaware of its consequences until it is too late. Once it expires, the taxpayer’s rights to a refund or to seek judicial review are permanently lost, regardless of the merits of the claim,” she wrote. “With many ERC claims, the IRS administrative delays consumed much of this limited window, placing taxpayers at real and immediate risk. Taxpayers who are working in good faith with the IRS should not be forced to file protective lawsuits simply to preserve their claims. Congress created legislation to provide an extension of time (Form 907) as a mechanism to prevent that outcome, but a safeguard must be accessible, understandable, and available to be effective for all taxpayers.
“The IRS’s new process is an important step toward protecting taxpayer rights in ERC cases but needs to be expanded to all disallowance cases,” Collins added. “Until processes are fully aligned for all claim disallowances, taxpayers must remain vigilant. The statutory clock continues to run, and waiting can mean losing the refund entirely. Don’t let this happen to you!”
Photo credit: Sean Lee/Unsplash
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Tags: Employee Retention Credit, ERC, IRS, tax credit, tax credits, Taxes
