The IRS has provided an important update regarding how businesses can dispute the disallowance of their Employee Retention Credit (ERC) claims. As of September 19, 2024, businesses now have two years to appeal an IRS denial of their ERC claim—an improvement over the previous 30-day deadline.
While this change offers more time for appeals, it comes with important conditions. Businesses must still act promptly to protect their ability to receive a refund or credit. Here’s what you need to know about disputing an IRS ERC disallowance and navigating the appeal process effectively.
Understanding the New Two-Year Timeline
The key update is that businesses now have two years to appeal an ERC claim denial. However, this timeline is not as straightforward as it may seem. Here’s why:
- The 30-Day Rule Still Matters: While you technically have two years to file a lawsuit or request an appeal, the IRS strongly advises that you dispute the disallowance within 30 days. This ensures you preserve your appeal rights and avoid delays.
- Delays Can Hurt Your Case: If you appeal an ERC disallowance, the IRS will first review your response before sending your case to the IRS Independent Office of Appeals. This internal review process eats into your two-year window.
- No Extensions for the Two-Year Limit: Filing an appeal does not extend the two-year deadline to file a lawsuit. If you fail to take legal action within that period, you may lose your chance for a refund—even if the IRS Appeals Office rules in your favor.
Key IRS Statement:
“If you don’t file suit within the two-year period or sign an agreement with us extending the two-year period to file suit, you may lose your ability to receive a refund, even if Appeals has already made a favorable decision about your claim.”
This means businesses must carefully strategize their approach to disputing an ERC denial.
Steps to Dispute an ERC Disallowance
If you receive IRS Letter 105-C, it means the IRS has denied your ERC claim. At this point, you have two primary options:
Option 1: Respond to the IRS and Request an Appeal
- Respond to IRS Letter 105-C – Within 30 days, provide a detailed response explaining why your ERC claim is valid. Include all requested documentation.
- Request an Appeal – If the IRS rejects your response, formally request an appeal.
- Submit Supporting Evidence – When filing your appeal, provide any additional evidence or explanations needed to support your claim.
- IRS Appeals Review – The IRS Independent Office of Appeals will review your case.
- Await a Decision – If the Appeals Office rules in your favor, you should receive your ERC refund or credit.
Risks of This Approach: The appeal process takes time, and you must still file a lawsuit within two years if necessary to preserve your claim.
Option 2: File a Lawsuit Against the IRS
If the IRS does not approve your ERC claim or you disagree with their decision, you can take the matter to court.
- File a Lawsuit in Federal Court – If your claim remains unresolved, file a lawsuit before the two-year deadline.
- Choose Your Venue – You can sue the IRS in either the U.S. Tax Court, U.S. District Court, or the U.S. Court of Federal Claims.
- Present Your Case – Provide the necessary evidence and arguments to prove your eligibility for the ERC.
- Await the Court’s Decision – If the court rules in your favor, the IRS will be required to pay the refund.
Risks of This Approach: Litigation can be costly and time-consuming, but it may be necessary to secure your rightful ERC refund.
Takeaways: Protect Your ERC Claim
- Act Quickly – Even though you have two years, respond to the IRS denial within 30 days to keep your appeal rights intact.
- Be Strategic – Consider whether appealing to the IRS or filing a lawsuit is the best course of action.
- Document Everything – Ensure you have strong records, supporting evidence, and legal documentation for your ERC claim.
- Monitor Your Timeline – If necessary, file a lawsuit before the two-year deadline to prevent losing your claim.
By understanding these rules and acting promptly, businesses can maximize their chances of successfully disputing an IRS ERC denial and securing the refunds they deserve.
