Easier ERC Extension Requests Won’t Resolve Taxpayer Dilemmas

When the IRS denies a taxpayer’s claim for employee retention credit, it issues a Letter 105-C or 106-C, giving the taxpayer two years from the date of the letter to resolve its ERC claim administratively or file a refund lawsuit in federal court.

The IRS has acknowledged that some businesses that claimed ERC well over two years ago are still waiting for their cases to be resolved. That leaves taxpayers with an uncomfortable dilemma: continue to pursue their claims administratively and hope the IRS ultimately reaches a favorable result, or undertake costly and time-consuming refund litigation in federal court.

Last month, the IRS gave taxpayers choosing the first option an easy way to hit the snooze button. But it might not be the right choice for everyone.

ERC’s Winding Path

The ERC has long been a source of frustration for all parties involved.

The IRS has struggled to administer the program after being deluged with claims. In 2023, it imposed a moratorium on processing new claims and then issued tens of thousands of denials at a time. Taxpayers, having faced long delays in receiving refunds, received denial notices as the first communication from the IRS in response to the ERC claim.

In response, taxpayers who wanted to dispute an ERC denial had to seek relief from the IRS Independent Office of Appeals. But that is a lengthy process, even in the best of times. These aren’t the best of times: Last year, resolving a case through the IRS Office of Appeals took an average of 337 days.

The IRS previously extended the time it allows taxpayers to request Appeals consideration of ERC claim denials from 30 days to two years. But even that longer clock is running down for many taxpayers. Once the IRS denies a refund claim, the taxpayer likewise has two years to file a lawsuit in federal court. Once the two-year window expires, that avenue is closed to the taxpayer.

But the window can be extended if both the taxpayer and the IRS sign a Form 907, “Agreement to Extend the Time to Bring Suit.” This gives the taxpayer and the IRS more time to resolve disputes administratively, while preserving the taxpayer’s right to go to court if a favorable resolution can’t be reached in Appeals.

IRS Announcement

On April 27, the IRS announced that taxpayers can submit a request through the IRS’s document upload tool and the agency will consider it if properly executed. The IRS also pledged to review the ERC backlog and issue a Notice CP320B alerting those it considers eligible.

But the process isn’t for everyone. Taxpayers must have received a Letter 105-C or 106-C, responded to it, and have at most six months remaining to file suit. If the denial came through a different letter or relates to a non-ERC matter, they aren’t eligible for this streamlined process.

This is an important development for taxpayers, but it can easily turn into a trap for the unwary. Taxpayers who want to continue through the Appeals process should keep several points in mind.

• Don’t rely on the IRS to notify them. While the IRS is planning to issue letters to those it deems eligible, waiting for the letter reduces the time available to submit and receive approval. With six months (or fewer) left, each day matters.
• Determine when the two-year window actually expires.
• Be strategic about the request. Typically, these agreements are only for two years or less. In some cases, it may make sense to ask for the full two years but in others a tighter window may be more appropriate.
• Make sure you receive the executed form back. The agreement isn’t valid until the IRS signs and returns the form. Don’t assume the agency has agreed to the request until you have it in writing.

What to Do

The announcement is good news for taxpayers, providing a streamlined method for extending the time to resolve ERC disputes through administrative means.

But this development comes almost two years after the initial wave of denials and applies to only a small subset of taxpayers. And while an extension allows more time to resolve a claim, it also means taxpayers may have to wait longer to resolve their cases and receive refund checks where warranted.

Eligible taxpayers should weigh their options. The IRS has already had a year and a half to resolve these cases, not counting the time between the refund claim and the denial. Does it make sense to wait another two years only to end up in the same position? It wouldn’t be unreasonable to say “enough is enough” and move the issue to a different forum.

Taxpayers who wish to continue with the administrative process should exercise a healthy dose of caution at each step. Independently verify eligibility, ensure the application procedures are followed, and don’t assume an agreement is valid until you have a copy in writing signed by both parties.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Holland King is a tax attorney at Taft Stettinius & Hollister specializing in tax credit compliance, litigation, and advisory services across federal and state jurisdictions.

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