An ERC Disallowance Starts a Two-Year Clock — and the IRS Just Built a Pressure Valve

Key takeaways

• A full or partial ERC disallowance — Letter 105-C or Letter 106-C — starts a two-year period to resolve the claim administratively or file a refund suit in federal court.
• On April 27, 2026 (IR-2026-58), the IRS announced a process for eligible taxpayers to extend that deadline using Form 907, "Agreement to Extend the Time to Bring Suit."
• The process is aimed at taxpayers awaiting IRS review of their disallowance response who have six months or less left on the two-year clock; the IRS sends Notice CP320B to those it identifies.
• The two-year period runs from the date of the disallowance letter — not from when the IRS gets around to reviewing the response — so the clock can expire while a taxpayer is still waiting.

The problem the process solves

The Employee Retention Credit has been the most contested area of recent tax administration. The IRS, working through a large backlog of claims it considers questionable, has issued disallowances at scale. A disallowance arrives as Letter 105-C (full) or Letter 106-C (partial), and it carries a consequence that is easy to overlook: the taxpayer generally has two years from the date of that letter to resolve the claim administratively or to file suit for the refund in federal court.

The structural problem is timing. A taxpayer who receives a disallowance and responds — disputing it, supplying documentation — is then at the mercy of the IRS's review queue. But the two-year clock runs from the date of the letter, not from the date the IRS finishes reviewing the response. With the agency short-staffed and the backlog deep, a taxpayer can do everything right, file a timely and substantive response, and still watch the two-year window close before the IRS or the Independent Office of Appeals has acted. At that point the only way to preserve the refund claim is to file a refund suit — an expensive step forced by administrative delay rather than by the merits.

What the IRS announced

On April 27, 2026, in IR-2026-58, the IRS introduced a process to relieve that pressure. Eligible taxpayers can extend the time to bring suit by executing Form 907, "Agreement to Extend the Time to Bring Suit," giving the IRS and Appeals more time to work the response without forcing the taxpayer into premature litigation.

The eligibility conditions are specific. The process is for taxpayers who are (1) still awaiting IRS consideration of their response to a disallowance and (2) have six months or less remaining in their two-year period. The IRS identifies qualifying taxpayers and sends them Notice CP320B; the taxpayer then submits Form 907 through the IRS Document Upload Tool using the code from the CP320B notice. Because the agency issues the notices on a rolling basis as it works the backlog, the relief reaches taxpayers over time rather than all at once.

What businesses with ERC exposure should do

The process is useful, but it is not automatic and it does not relieve the taxpayer of responsibility for the clock.

Know the date on the letter. The two-year period runs from the disallowance letter, and it is the single most important date in an ERC dispute. A business that has received a 105-C or 106-C should calendar that date immediately and work backward from it, not wait for the IRS to prompt action.

Do not rely solely on receiving a CP320B. The extension process depends on the IRS identifying the taxpayer and sending the notice. A business approaching the end of its two-year window should be tracking the deadline independently and preparing for the possibility that it must either secure an extension or file a protective refund suit before the clock runs. Waiting passively for a notice that may not arrive in time is not a strategy.

Respond substantively, and keep the record. The extension process exists to give the agency time to evaluate a response. That presupposes a response worth evaluating — one that addresses the basis for the disallowance with documentation. A thin response does not become stronger because the deadline was extended.

Bottom line

A denied ERC claim starts a two-year clock that runs from the disallowance letter, and that clock can expire while the taxpayer is still waiting for the IRS to act. The April 2026 process gives eligible taxpayers a way to extend it, but the responsibility to track the deadline stays with the business. Any company holding a 105-C or 106-C should calendar the two-year date now and treat an extension or a protective suit as a decision to make before the window closes — not after.