ERC Disallowance Letter 105-C

Your Options After Denial

Letter 105-C from the IRS means your entire Employee Retention Credit claim has been denied. Not reduced, not modified, not held for review – denied completely. If you’re holding this letter right now, you’re probably confused about why, angry about how, and uncertain about what comes next. You’re also facing deadlines that most people don’t understand until it’s too late. The 30-day response window in the letter is important but not absolute. The two-year deadline to file a federal lawsuit is absolute and cannot be extended without specific IRS agreement. Miss one, and you lose options. Miss the other, and you lose everything.

Here’s something that will probably make you even angrier: the IRS issued over 28,000 of these denial letters in summer 2024 without ever requesting documentation from the businesses they denied. They ran claims through an automated “risk scoring model” and issued denials based on algorithm output. No human being reviewed your specific facts. No examiner asked to see your payroll records or government orders. A computer flagged your claim as “high risk,” and a form letter went out saying you’re denied. That’s not an audit. That’s a rejection by software.

This article explains what Letter 105-C actually means, how the IRS denial process works, and what your options are for fighting back. The system is stacked against you in ways you probably don’t realize, but understanding those obstacles is the first step toward navigating them.

What Letter 105-C Actually Means

Letter 105-C is your official notice that the IRS has fully disallowed your ERC claim. The letter states the reason for the IRS’s decision, the date of the decision, and the tax period for which the claim is denied. It also explains your right to appeal and your deadline to file a lawsuit in federal court if you want to challenge the denial.

Heres the irony that infuriates most people who recieve this letter: the stated reason for denial is often generic and uninformative. Many letters contained only a vague statement under “Why We Can’t Allow Your Claim” that tells you basicly nothing about your specific situation. You know your denied. You dont know why in any meaningful sense.

The IRS has acknowledged this problem. Some denial letters “inadvertantly omitted a paragraph highlighting the process for filing an appeal.” Think about that. The IRS sent thousands of denial letters that didnt even explain how to appeal. They later admitted this was a mistake, but if you recieved one of those defective letters, the confusion was real and the stakes were high.

Letter 105-C is a full disallowance – your entire claim for that quarter is rejected. This is different from:

• Letter 106-C – a partial disallowance (the IRS accepts some of your claim but denies the rest)
• Letter 6577-C – a recapture letter for refunds youve already recieved

Knowing which letter you have matters becuase the implications and response strategies are different for each.

Denied By Algorithm – The Risk Scoring Model

During the ERC processing moratorium, the IRS developed an automated “risk scoring model” to evaluate claims. This system uses data from your filing and publicly available information to predict wheather your claim is valid or invalid. Claims deemed “high risk” by the algorithm are flagged for denial without any human review of your actual eligibility.

Heres the paradox that makes this so frustrating. You were denied based on pattern analysis before anyone looked at your documentation. The IRS decided your claim was probably invalid based on data characteristics, not based on examining your specific facts. Between 10 and 20 percent of reviewed claims fell into the “highest risk” category and were automaticaly denied. Thats one in five to one in ten claims rejected by computer before any human involvement.

The risk scoring model looks at factors like:

• The size of your claim relative to your W-2 employee count
• Wheather your ERC preparer has been flagged for suspicious claims
• What quarter your claiming
• How your claim compares to statistical patterns the IRS considers problematic

If the algorithm dosent like what it sees, you get Letter 105-C.

This approach has faced legal challenges. In April 2025, two tax preparation firms sued to halt the IRS’s use of this automated model, arguing that summary disallowances without individual review violate the Administrative Procedure Act. The court denied there motion for preliminary injunction, but the underlying question – wheather algorithmic denial without human review is legally appropriate – remains contentious.

The Reverse Audit Trap

Under normal IRS procedure, an audit works like this: the IRS examines your return, requests documentation, reviews your evidence, and then makes a determination. You have the opportunity to substantiate your position before any denial occurs.

ERC disallowances work backwards. The IRS denies your claim first, then asks you to prove you were eligible. This is what practitioners call a “reverse audit” – the presumption of invalidity comes before any examination of your actual facts.

You have to prove you qualify AFTER being told you dont qualify. Your guilty until proven innocent. The burden is on you to assemble documentation, prepare explanations, and convince the IRS they made a mistake – all within tight deadlines and without ever having had the chance to present your case before the denial.

This inversion of normal process means many legitimatly eligible businesses are swept up in mass denials. The IRS acknowledges that there risk scoring model isnt perfect. Some percentage of denied claims will turn out to be valid. But the IRS put the burden on taxpayers to prove that validity after the fact, rather then taking the time to examine claims properly before issuing denials.

105-C vs 106-C vs 6577-C – Know Which Letter You Have

There are three different ERC letters, and confusing them is a costly mistake. Each letter means something different and requires a different response strategy.

Letter 105-C is a full disallowance. Your entire ERC claim for the quarter listed is rejected. If you do nothing, you get no credit at all. The vast majority of these letters are being issued for the third quarter of 2021, which has a five-year extended statute of limitations for IRS enforcement.

Letter 106-C is a partial disallowance. The IRS accepts that you qualify for some ERC but denies the amount exceeding there calculated limits. Usually this happens becuase your claim exceeded the per-employee caps:

• $5,000 total per employee for 2020
• $7,000 per employee per quarter for 2021

If you do nothing with a 106-C, the IRS will process the portion they approved and deny the rest.

Letter 6577-C is completly different – its a recapture letter. This means the IRS already paid you an ERC refund and now wants the money back. The consequences are more immediate becuase you actualy have to repay funds rather then just losing a claim that was never paid.

Make sure you know which letter you have before deciding how to respond. The deadlines and procedures vary, and treating one letter type as if it were another can create serious problems.

The 30-Day Deadline That Isnt Really 30 Days

Letter 105-C tells you to respond within 30 days. This sounds like a hard deadline, but its actualy administrative guidance rather then a legal requirement. The IRS has indicated willingness to accept protests filed after the 30-day period.

That said, responding within 30 days protects you in important ways. Early response preserves your two-year lawsuit window by demonstrating you disputed the denial promptly. It also gets your protest into the IRS review process sooner, which matters becuase that process can take a long time.

Heres the hidden connection that trips people up. The 30-day deadline is administrative. You can probably miss it without losing all your rights. But the two-year deadline to file a lawsuit in federal court is absolute under IRC Section 6532(a)(1). That clock starts ticking from the date on your Letter 105-C, not from when you actually recieve it, and not from when you respond. Going to Appeals does not extend this time period.

So yes, take the 30-day deadline seriously even though it isnt technically absolute. Responding quickly keeps your options open and starts the review process. But understand that the two-year lawsuit deadline is the real wall you cannot get past.

The Two-Year Deadline That Is Absolutely Final

This is the most important deadline you face, and its often misunderstood. From the date on Letter 105-C, you have exactly two years to file a lawsuit in federal district court or the Court of Federal Claims challenging the denial. If you dont file suit within two years, your claim dies forever – even if the IRS later agrees you were right.

Heres the uncomfortable truth that nobody wants to beleive: the IRS is legally barred from issuing your refund after two years, even if Appeals has already made a favorable decision in your case. The statute says what it says. IRC Section 6532(a)(1) is clear. Once two years pass from the date of disallowance, the IRS cannot pay you regardless of what anyone has determined about your eligibility.

This creates a nightmare scenario that actualy happens to real taxpayers:

1. You submit a protest
2. The IRS assigns an examiner who eventually upholds the denial
3. Your case goes to Appeals
4. Appeals takes 18 months to review it
5. By the time Appeals decides in your favor, more then two years have passed from your original Letter 105-C
6. The IRS agrees you should get the money, but they cant issue it becuase the statute has run

You win the argument and lose the refund.

The case of American Lighting Company v. United States illustrates this danger. The taxpayer had to file suit on June 25, 2025 – one day before the two-year deadline would have expired – becuase the IRS’s failure to act on there appeal was causing the statute to run out. Without that lawsuit filing, they would have lost the claim entirely.

How To Respond – Small Dollar vs Formal Protest

How you respond to Letter 105-C depends on how much money is at stake. The IRS has different procedures for smaller and larger claims.

For claims of $25,000 or less, you can use the “Small Dollar Case Appeal” process. This is a simplified procedure that dosent require a formal written protest. You submit a brief written statement explaining why you disagree with the denial, along with supporting documentation.

For claims over $25,000, you must submit a formal written protest. This requires specific elements:

• A statement that you want to appeal the IRS’s decision
• Your name and contact information
• The letter date and tax period
• A statement of facts supporting your position
• A statement of law if applicable
• A statement of the relief requested
• Your signature under penalties of perjury

Regardless of claim size, you need to provide documentation supporting your eligibility. This means:

• A description of your business operations
• Evidence showing you either experienced a significant decline in gross receipts OR a full or partial suspension due to government orders
• Payroll records and worksheets showing how you calculated the credit
• A statement confirming you didnt claim ineligible wages

The IRS guidance is clear that “a narrative alone will not suffice.” You need actual documentation, not just explanations. If you cant produce the records showing you qualified, your protest is unlikely to succeed.

What Happens After You Submit Your Protest

Many people assume there protest goes directly to the IRS Independent Office of Appeals. Thats not how it works. Your response first goes to an IRS examiner who conducts a review much like an audit. This examiner evaluates your documentation and decides wheather the denial should stand.

If the examiner concludes your claim should be allowed, the IRS processes your credit without involving Appeals. If the examiner upholds the denial and your protest specifically requested an appeal, only then does your case go to Appeals.

This two-stage process means additional delay. Your case dosent just land on an Appeals officer’s desk immediately. It goes through examination first, then potentially moves to Appeals if the examiner disagrees with you. Each stage takes time, and time is your enemy given the two-year lawsuit deadline.

The Taxpayer Advocate Service has raised concerns about this process. There worried that the IRS’s compressed, cursory reviews may cause taxpayers to run into the refund statute of limitations. The administrative process can literally defeat your legal rights through sheer delay.

When Appeals Takes Too Long

The scenario that keeps tax practitioners up at night is this: Appeals agrees with the taxpayer, but the decision comes after the two-year lawsuit window has closed. The IRS agrees the money is owed, but they cant pay it. The statute of limitations has become a statute of defeat.

This isnt hypothetical. With over 597,000 unprocessed ERC claims still in inventory and tens of thousands of denials being issued, the appeals pipeline is backed up. Cases that should take months are taking years. And the two-year clock keeps ticking regardless of how long the IRS takes to process your appeal.

If youve submitted a protest and months are going by without resolution, you need to be watching your two-year deadline carefully. You cannot rely on the IRS to resolve your case in time. You cannot assume the administrative process will protect you. If the deadline is approaching, you may need to file suit just to preserve your rights, even if youre still hoping for administrative resolution.

The Form 907 Lifeline

Theres one way to extend the two-year lawsuit deadline: Form 907, Agreement to Extend the Time to Bring Suit. This form allows you and the IRS to jointly agree to extend the filing period beyond two years.

Heres the catch: both parties must sign Form 907 before the original two-year deadline expires. You cant sign it after the deadline has passed. And the IRS isnt required to agree to the extension – its voluntary on there part.

If youre in Appeals and the two-year deadline is approaching, requesting a Form 907 extension should be a priority. This requires proactive communication with the IRS and careful tracking of your deadlines. If the IRS agrees to extend, you buy more time for administrative resolution without losing your lawsuit option. If they dont agree, you know you need to file suit to preserve your claim.

Many taxpayers dont know Form 907 exists untill its too late. Now you know.

Q3 2021 – Why This Quarter Gets Targeted

If your denial letter references the third quarter of 2021, your not alone. The vast majority of Letter 105-C disallowances are targeting Q3 2021 claims. Theres a reason for this, and its not coincidental.

Congress extended the statute of limitations for ERC claims involving Q3 and Q4 of 2021 to five years instead of the normal three. This means the IRS has until April 2027 to audit and assess these claims – giving them significantly more time to pursue enforcement actions.

Heres the asymmetry that works against you. The IRS has five years to come after Q3 2021 claims. But your two-year lawsuit deadline still runs from the date of your denial letter, not from the end of the IRS’s extended enforcement period. They have extra time to pursue you, but you dont have extra time to pursue them.

This timing advantage explains why Q3 2021 is the focus of so many denials. The IRS can deny your claim now, forcing you to fight back on a two-year timeline, while retaining years of enforcement runway if you actually had recieved the credit. The system is designed to favor the IRS at every turn.

What Documentation You Need To Win

If your going to fight the denial, documentation is everything. The IRS guidance is explicit that explanations without supporting documents wont work. You need actual records, not just narratives about what happened.

For government order suspension claims, you need:

• Copies of the actual government orders you relied on (not just references to them)
• Evidence showing how those orders caused a full or partial suspension of your operations
• Documentation of what portion of your business was affected and by how much

For gross receipts decline claims, you need:

• Quarterly revenue figures for the relevant periods
• Comparison calculations showing the required decline thresholds were met
• Financial records supporting those figures

For all claims, you need:

• Complete payroll records for the quarters claimed
• Worksheets showing exactly how you calculated the credit amount
• Documentation of the controlled group analysis if applicable
• Proof that claimed wages werent also used for PPP loan forgiveness

If your ERC preparer didnt provide you with this documentation, or if they never asked for it in the first place, that tells you something about how your claim was prepared. It may also tell you something about your chances of winning on appeal.

Should You Fight Or Accept The Denial?

If you genuinly didnt qualify for the ERC – if you know your claim was filed improperly, perhaps at the urging of an aggressive promoter – accepting the denial may be the right choice. Fighting a losing battle wastes time and money.

But if you legitimatly qualified, accepting the denial means losing money you were entitled to. The IRS’s algorithm isnt perfect. There risk scoring model flags claims based on statistical patterns, not individual facts. Many valid claims have been wrongly denied in the mass disallowance process.

Heres the inversion that matters: accepting denial might actualy be worse then fighting it if you have a legitimate claim. Once the two-year deadline passes, your claim is gone forever. No amount of later evidence can bring it back. The time to fight is now, while options still exist.

Get your documentation together. Evaluate your actual eligibility honestly. If you can support your claim with payroll records, government orders, and proper calculations, you should seriously consider protesting the denial. The administrative process may be frustrating and the timeline may be tight, but losing a legitimate claim by default is worse.

The ERC denial process has affected tens of thousands of businesses, with 84,000 disallowance letters issued so far. You’re not alone in this, but your timeline and your options are yours alone to manage. The 30-day response window starts your administrative process. The two-year lawsuit deadline ends it. Everything you do between those two points determines wheather you preserve your claim or lose it forever.