Is Your ERC Claim on the Clock?

If your business filed an Employee Retention Credit (ERC) claim that was disallowed by the IRS, there's a new development you need to know about, and depending on where you are in the process, time may be running short.

The IRS recently announced a new, streamlined option that gives certain taxpayers the ability to request additional time to resolve a disallowed ERC claim without immediately resorting to a refund lawsuit. For businesses that have been waiting on the IRS to work through a backlog of appeals and reviews, this is meaningful news. But it comes with a critical catch: the clock doesn't stop just because you're waiting.

A Quick Recap: How ERC Disallowances Work

During the pandemic era, millions of businesses filed ERC claims to recover payroll taxes paid during a period of significant economic disruption. In the years since, the IRS has been working through a large volume of those claims and disallowing many of them, either in full or in part.

When the IRS disallows an ERC claim, it issues one of two letters: a Letter 105-C for a full disallowance, or a Letter 106-C for a partial disallowance. From the date of that letter, businesses generally have two years to either resolve the matter administratively with the IRS or file a refund suit in federal court.

Here's where many businesses get caught off guard: that two-year deadline keeps running regardless of what else is happening. If you filed a protest or your case is sitting with the IRS Independent Office of Appeals, that does not pause the clock. Once the two-year window closes, the IRS cannot issue a refund, even if it later agrees your claim was valid.

What's New: Form 907 and the Extended Deadline Option

To address this, the IRS has introduced a way for eligible taxpayers to request an extension of that two-year deadline by submitting Form 907, Agreement to Extend the Time to Bring Suit.

This option is available if your business meets both of the following conditions:

• You are still waiting for the IRS to consider your response to a Letter 105-C or 106-C disallowance, and
• You have six months or less remaining before your two-year deadline expires

If both apply, you can now submit Form 907 directly through the IRS Document Upload Tool at IRS.gov/DUTReply. When using the tool, select notice "CP320B" from the drop-down menu. The IRS will review properly submitted forms and notify you in writing whether the extension has been approved. Importantly, the extension is not effective until the IRS signs and returns the agreement, so submitting the form is just the first step. You'll want to hold onto your submission confirmation and watch for the countersigned copy.

Some businesses may receive a notice called CP320B directly from the IRS identifying them as eligible for this process. However, you don't need to receive that notice to be eligible. If you believe you meet the criteria, you can still submit Form 907.

Don't Wait for the IRS to Warn You

One of the more frustrating realities of this process is that businesses can be actively engaged (responding to notices, working with Appeals, communicating with the IRS) and still find themselves running out of time without realizing it.

The two-year deadline tied to your disallowance letter is a hard statutory cutoff. It doesn't bend for administrative delays, processing backlogs, or how long the IRS takes to respond to your documentation. If that window closes while your claim is still unresolved, your ability to recover those funds goes with it.

That's what makes this new Form 907 process worth paying attention to. It's a concrete way to protect your position while the IRS continues working through the review. But you have to initiate it. It won't happen automatically, and waiting to hear from the IRS before acting could cost you the opportunity entirely.

What to Do Right Now

Whether you're a business owner managing this directly or working with an advisor, here are the steps to take immediately:

1. Locate your disallowance letter.

Find your Letter 105-C or 106-C and confirm the exact date it was issued. This is the date your two-year clock started.

2. Calculate your remaining time.

Determine how much time is left in your two-year window. If you're within six months, act now.

3. Confirm your eligibility.

Are you still waiting on the IRS to consider your response? If so, you may qualify to submit Form 907.

4. Submit Form 907 through the IRS Document Upload Tool.

Go to IRS.gov/DUTReply, select "CP320B," and follow the step-by-step instructions. Save your confirmation of submission.

5. Watch for written IRS approval.

The extension is only valid once the IRS signs and returns the agreement. Don't assume it's approved until you have that confirmation in hand. 

6. Consult your advisor.

Given the deadlines and legal implications involved, this is not a situation to navigate alone. An experienced tax advisor can help you evaluate your options and make sure nothing falls through the cracks.

The Bottom Line

The ERC landscape has been complicated from the start, and the disallowance and appeals process has stretched on far longer than most businesses anticipated. This new option from the IRS is a practical relief for businesses caught in limbo, but it only helps if you act before the deadline arrives.

If your ERC claim was disallowed and you're not sure where your two-year clock stands, now is the time to find out. Reach out to your advisor and make sure your options are protected.

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