IRS offers extension option for taxpayers facing ERC claim deadlines

The IRS is offering a streamlined way for some taxpayers to extend the period for the agency and the IRS Independent Office of Appeals to review their response to a disallowance of their employee retention credit (ERC) claim, the agency said Monday in a news release.

As of Monday, taxpayers who meet two requirements can request more time to resolve their claims administratively or to file a refund suit in federal court by filing Form 907, Agreement to Extend the Time to Bring Suit.

The taxpayers must (1) be waiting for the IRS to consider the taxpayer’s response to the notice of disallowance on Letter 105-C or 106-C and (2) have six months or less remaining before the two-year period to resolve their claim administratively or to file a refund suit expires.

Two-year deadline

When the IRS disallows an ERC claim, taxpayers receive a Letter 105-C or 106-C. They then generally have two years from the date of that letter to resolve the claim administratively or to file a refund lawsuit if they disagree with the decision.

Taxpayers may protest the IRS’s disallowance with Appeals, but that does not extend this statutory two-year deadline.

After the two-year period ends, the IRS cannot issue a refund, even if it later decides in the taxpayer’s favor.

ERC background

The ERC, which Congress passed in March 2020, was designed to help certain businesses continue paying employees during the COVID-19 pandemic while operations were fully or partially suspended due to a government order or when the businesses had a significant decline in gross receipts during the eligibility periods. It was generally available to eligible businesses from March 31, 2020, to Sept. 30, 2021, and until Dec. 31, 2021, for recovery startup businesses.

At one point, at least, the IRS had a backlog of 1.3 million ERC claims. To counter that flood, resulting from ERC mills, the IRS took various steps, including instituting two voluntary disclosure programs, a moratorium on processing claims, and a claim withdrawal process.

‘Fundamentally unfair’ situation

In the summer of 2024, the IRS issued about 28,000 ERC disallowance notices, of which many were based on risk filter analyses rather than a prior examination, National Taxpayer Advocate Erin Collins said in her blog Monday.

Instead, many cases were sent to IRS Compliance for initial review because the IRS had not examined the claim previously, Collins said. And the two-year period continued to run when, ordinarily, the Compliance review would occur before the notice of disallowance and before the two-year deadline goes into effect.

“As a result, some taxpayers may reach the end of the two-year period before the IRS completes its review, losing their right to both a refund and judicial review,” she wrote. “This creates a fundamentally unfair situation where administrative delay alone can determine the outcome.”

Taxpayers should not be forced to file protective lawsuits simply to preserve their claims, Collins said.

Glen Frost, managing partner and founder of Frost Law, which has worked on dozens of ERC cases with the IRS, said the IRS’s decision helps both taxpayers and the IRS.

“Agreeing to these time extensions will protect hard-working individuals and businesses from losing potential refunds,” he said in a statement. “Not only does this protect taxpayer rights, it avoids a litigation nightmare for the government by avoiding time-consuming lawsuits.”

How to file

The law allows the IRS and a taxpayer to agree in writing to extend the time to sue if both parties sign Form 907 before the two-year period expires, the IRS said. A fully executed Form 907 gives the IRS more time to consider the disallowance administratively and gives the taxpayer more time to sue.

Taxpayers who meet the two requirements can submit Form 907 requesting an extension via the IRS Document Upload Tool or by going to IRS.gov/DUTReply and selecting notice “CP320B” from the dropdown menu.

The IRS said it will send Notice CP320B to taxpayers identified as eligible for this new Form 907 submission method. Step-by-step instructions are available at IRS.gov/CP320B. Those who do not receive a letter and believe they meet the criteria may still be eligible for an extension. Instructions are available at IRS.gov/erc105c and IRS.gov/erc106c for those taxpayers.

Taxpayers who received an ERC claim disallowance notice and are unsure of their deadline should review the 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.

Meanwhile, the IRS said it continues to process ERC claims and appeals.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.