IRS Offers Extension Option for Taxpayers Facing ERC Disallowance Deadlines

WASHINGTON — The Internal Revenue Service on Monday announced a new, streamlined process for certain taxpayers to extend the two-year statutory deadline for challenging a disallowed Employee Retention Credit (ERC) claim. The measure is designed to give both businesses and the agency’s Independent Office of Appeals more time to resolve disputes administratively, potentially avoiding costly and time-consuming federal litigation. This procedural relief is a significant development for the many small and mid-sized businesses caught in the complex and often delayed ERC appeals process. The unforgiving nature of the two-year deadline has created immense pressure on companies that believe their claims were incorrectly denied, forcing them into a difficult choice between abandoning a potentially valid claim or initiating expensive legal action. When the IRS disallows an ERC claim, it issues a Letter 105-C for a full disallowance or a Letter 106-C for a partial disallowance. According to federal law, a taxpayer generally has two years from the date printed on that letter to either resolve their disagreement with the agency or file a refund lawsuit in federal court. A critical and often misunderstood point is that formally protesting the disallowance with the IRS Independent Office of Appeals does not pause or extend this two-year period. This has created a high-stakes scenario for many businesses. If the two-year window closes before a lawsuit is filed or a formal extension is executed, the IRS is legally barred from issuing a refund, even if the Appeals office subsequently rules in the taxpayer's favor. With significant backlogs in claim processing and appeals, many businesses have found their deadlines rapidly approaching while their cases remain unresolved. To address this, the IRS is now offering a simplified path to an extension for a specific group of taxpayers. According to the agency's announcement, a business is eligible for this new process if it meets two conditions: first, it must be awaiting an IRS review of its response to a Letter 105-C or 106-C, and second, it must have six months or less remaining before its two-year deadline to file a suit expires. Eligible taxpayers can now file Form 907, Agreement to Extend the Time to Bring Suit, through the IRS Document Upload Tool (DUT). The agency is also proactively sending a new notice, CP320B, to taxpayers it has identified as meeting the criteria. This notice includes a QR code that links to a fillable version of Form 907, which can then be signed and submitted electronically. Once the IRS receives and countersigns the form, a copy is returned to the taxpayer, officially extending the deadline and providing more time for an administrative resolution. In our experience, the rigidity of the two-year statute of limitations has been a major source of anxiety for clients with legitimate ERC claims. This new, streamlined extension process is a welcome lifeline, but it is not automatic and requires proactive management. The burden remains on the business owner to monitor their deadline and take action. Navigating these procedural requirements is a core part of our tax preparation and compliance services, as a missed deadline can be financially devastating. For businesses uncertain about their status or how to proceed, the experts at C&S Finance Group LLC at csfinancegroup.com can provide critical guidance to protect their rights. The IRS has stated that this initiative is intended to prevent a “litigation nightmare for the government” and protect the rights of taxpayers. The timing of the announcement reflects the agency's awareness that many of the earliest ERC claim disallowances are now approaching the end of their two-year period. The move also follows recommendations from the National Taxpayer Advocate, which has highlighted how processing delays have harmed and frustrated business owners. Taxpayers who believe they are eligible for the extension but have not received Notice CP320B are not excluded. The IRS has provided step-by-step instructions on its website at IRS.gov/erc105c and IRS.gov/erc106c for those who wish to file Form 907 proactively. Businesses unsure of their specific deadline are advised to review the original disallowance letter or contact the IRS using the phone number on their most recent notice. This procedural fix addresses an urgent symptom of the broader administrative challenges surrounding the ERC program. While the extension is a crucial tool, it underscores the ongoing complexity and delays that have defined the credit since its inception. This is not a signal for businesses to become complacent, but rather a strategic opportunity to ensure their case receives a full and fair review without being forced prematurely into the court system. Moving forward, tax professionals and affected business owners will be closely monitoring the efficiency with which the IRS processes these Form 907 extension agreements. The success of this streamlined approach may determine whether thousands of ERC disputes are resolved within the agency or are pushed into the federal court system, and it could set a precedent for how the IRS manages similar administrative logjams in the future.