IRS ERC Disallowance 2026: New Extension Process Explained

What Is an IRS ERC Disallowance, and Why Are So Many Small Businesses Affected?

The Employee Retention Credit (ERC) was a pandemic-era payroll tax credit designed to help businesses retain employees during COVID-19 shutdowns and revenue disruptions in 2020 and 2021. Billions of dollars in ERC refunds were claimed by small businesses across the country. However, the IRS subsequently identified widespread issues with ERC filings — ranging from inflated claims to outright fraud promoted by aggressive third-party preparers — and began issuing ERC disallowance letters at scale starting in 2023 and 2024.

If your ERC claim was denied, you received one of two official notices:

• Letter 105-C — A full disallowance of your ERC claim for one or more tax periods. This is your legal notice that the IRS has denied the entire credit amount you claimed.
• Letter 106-C — A partial disallowance, meaning the IRS has denied a portion of your ERC claim, often because the amount claimed exceeded credit limits for 2020 or 2021.

Upon receiving either letter, federal law gives you two years from the date of that letter to either resolve the matter with the IRS administratively (through the Independent Office of Appeals) or file a refund lawsuit in federal court. For many small businesses that received ERC disallowance letters in 2024, that two-year window is now rapidly closing — which is precisely why the IRS took action with IR-2026-58. For ongoing tax and accounting insights on IRS compliance topics like this one, bookmark our resource library.

IRS IR-2026-58: The New ERC Disallowance Extension Process Explained

Announced on April 27, 2026, IRS IR-2026-58 introduces a new, streamlined method for eligible taxpayers to extend the two-year review period for their IRS ERC disallowance 2026 case — giving both the taxpayer and the IRS more time to reach an administrative resolution without rushing to litigation.

The mechanism is Form 907, Agreement to Extend the Time to Bring Suit. This form, when signed by both the taxpayer and the IRS, legally extends the two-year statute of limitations period, preserving the government’s ability to issue a refund and the taxpayer’s right to pursue their claim. Previously, Form 907 extensions were handled primarily through the IRS Appeals Office — but as the volume of unresolved ERC denial cases at Appeals has grown, the IRS has now created a direct electronic submission pathway available to all eligible taxpayers.

Starting April 27, 2026, eligible taxpayers can submit Form 907 electronically via the IRS Document Upload Tool — a faster, more accessible option than the legacy Appeals process. You can access the official announcement directly on the IRS newsroom at IRS.gov.

Who Is Eligible for the New Form 907 ERC Disallowance Extension?

The IRS has established two specific eligibility requirements for the new streamlined Form 907 submission process. Your small business must meet both conditions:

1. You are still waiting for the IRS to review your response to a Letter 105-C or Letter 106-C disallowance notice. In other words, you’ve already submitted a rebuttal or supporting documentation to challenge the denial, and the IRS has not yet issued a final determination.
2. You have six months or fewer remaining before your two-year period expires. The two-year window runs from the date of the original disallowance letter. If your deadline is within the next six months, you are eligible to request this extension.

Importantly, you do not need to have received a specific notice inviting you to use this process. If you believe you meet both criteria, you can proactively submit Form 907 through the IRS Document Upload Tool. You don’t need to wait to be contacted by the IRS.

How to Submit Form 907 for an IRS ERC Disallowance Extension — Step-by-Step

Here is the process for eligible small businesses to request an ERC disallowance extension using the new IRS procedure as of May 2026:

1. Confirm your eligibility. Review your Letter 105-C or 106-C and note the date it was issued. Calculate your two-year deadline. If it falls within the next six months, you qualify.
2. Obtain Form 907. Download the current version of Form 907 (Agreement to Extend the Time to Bring Suit) from IRS.gov.
3. Complete Form 907. Fill out all required fields accurately, including your taxpayer identification number, the tax periods in question, and the specific ERC disallowance referenced in your letter.
4. Sign the form. The form must be signed by an authorized representative of the business (the taxpayer or an authorized officer/partner).
5. Submit via the IRS Document Upload Tool. Go to the IRS Document Upload Tool at IRS.gov and upload the completed, signed Form 907 electronically. This is the new streamlined pathway introduced by IR-2026-58.
6. Retain confirmation. Keep a copy of the uploaded form and any confirmation receipt from the IRS Document Upload Tool for your records.

Once submitted, both parties — you and the IRS — must sign the form before the two-year period expires for the extension to be valid. The IRS will countersign and return the executed form, formally extending your window to either reach an administrative resolution or file suit in federal court.

Why This IRS ERC Disallowance Update Matters for Small Businesses in 2026

Before IR-2026-58, small business owners facing ERC disallowances with expiring two-year deadlines were stuck between two painful choices: abandon the claim entirely or file an expensive refund lawsuit in federal court (either in U.S. District Court or the U.S. Court of Federal Claims). Litigation against the federal government is not a realistic option for most small businesses — it’s financially prohibitive and time-consuming.

The IRS itself acknowledged this problem in IR-2026-58, noting that it is “aware that some taxpayers are approaching the end of this two-year period” and that this new process is designed to allow “more time to resolve their claims administratively.” In plain terms: the IRS is trying to clear a backlog of ERC cases while simultaneously giving legitimate claimants a fair shot at having their documentation reviewed before the clock runs out.

For small business owners who genuinely qualified for the ERC and have already submitted documentation to the IRS challenging a wrongful ERC disallowance, this extension could be the difference between recovering tens of thousands — or even hundreds of thousands — of dollars in legitimate credits versus forfeiting that money entirely. According to the IRS Taxpayer Advocate Service, unresolved ERC cases remain among the top sources of taxpayer burden in recent years.

Understanding Your ERC Disallowance Letter: 105-C vs. 106-C

If you’ve already received an IRS ERC disallowance notice, here’s a clear breakdown of what each letter means for your situation in 2026:

Letter 105-C — Full ERC Disallowance

Letter 105-C is your official legal notice from the IRS that your entire ERC claim for the stated tax period has been denied. Common reasons include:

• The IRS determined your business was not eligible for the ERC (e.g., you did not experience a qualifying suspension or revenue decline)
• Your claim was filed after the applicable deadline
• The IRS determined the business did not have qualifying employees or wages during the claimed period
• The claim was flagged as high-risk based on the IRS’s ERC compliance criteria

If you received Letter 105-C and disagree with the disallowance, you cannot use the ERC claim withdrawal program — that option is no longer available for tax periods covered by a 105-C. Your path forward is to respond with supporting documentation and, if needed, pursue the new Form 907 extension process.

Letter 106-C — Partial ERC Disallowance

Letter 106-C notifies you that the IRS has partially denied your ERC claim. This typically occurs when the IRS determines that your claimed credit amount exceeded the allowable limits for 2020 or 2021, or when only certain quarters or wage categories are accepted. If your Letter 106-C disallows your ERC claim in full (despite being labeled partial because it allows other return changes), you should follow the same guidance as a 105-C response.

IRS ERC Disallowance Action Plan: What Small Businesses Should Do Right Now

The new IRS ERC disallowance extension process is time-sensitive by design. Here is a clear action plan for small business owners who received a disallowance letter:

Step 1: Locate Your ERC Disallowance Letter and Check the Date

Pull out your Letter 105-C or 106-C and identify the exact date it was issued. Your two-year deadline runs from that date. If that deadline falls on or before October 27, 2026 (six months from the date of IR-2026-58), you are a prime candidate for the new Form 907 extension process.

Step 2: Confirm You Already Responded to the Disallowance

Form 907 eligibility requires that you have already submitted a response to the IRS challenging your ERC disallowance. If you haven’t responded yet, do so immediately — ideally with the help of a qualified CPA or tax professional who can ensure your rebuttal includes the proper documentation (payroll records, government orders, gross receipts data, and other supporting evidence).

Step 3: Assess Whether Your ERC Claim Has Merit

Before investing time and resources in extending your review period, work with your CPA to honestly assess whether your original ERC claim was valid. The IRS is reviewing documentation closely, and if your claim was prepared by a third-party promoter using aggressive or incorrect eligibility standards, proceeding may not be in your best interest. However, if your business genuinely experienced a qualifying suspension of operations or a significant revenue decline in 2020 or 2021, fighting the IRS ERC disallowance is absolutely worth pursuing. Explore our CPA services to see how we can help evaluate your claim’s merits.

Step 4: File Form 907 Before the Deadline

If you are eligible, complete and submit Form 907 through the IRS Document Upload Tool as soon as possible — do not wait until the last few weeks before your two-year deadline. The IRS must also countersign the form before the two-year period expires, so give both parties enough time to execute the agreement.

Step 5: Continue Working the Administrative Process

Filing Form 907 buys you time — but it doesn’t resolve your claim on its own. Continue gathering and organizing your supporting documentation, stay in communication with your tax advisor, and be responsive to any IRS requests for additional information. The goal is to secure a favorable administrative resolution without the need for litigation.

Common Mistakes Small Businesses Make After Receiving an IRS ERC Disallowance

Small business owners navigating IRS ERC disallowances in 2026 often make several avoidable errors that weaken their position:

• Ignoring the disallowance letter. Many business owners, overwhelmed by the complexity, simply don’t respond. This is the single worst thing you can do — silence is treated as acceptance of the disallowance.
• Missing the two-year deadline. The two-year window is a hard statutory deadline. Once it passes, your ability to pursue a refund is gone — unless you’ve filed a valid Form 907 extension before the expiration date.
• Relying on the same third-party promoter who prepared the original claim. Many ERC mills are no longer in business or cannot provide adequate documentation to support the claims they prepared. Work with a reputable CPA firm instead.
• Failing to organize supporting documentation. A strong rebuttal to a 105-C or 106-C requires specific evidence: certified payroll records, government suspension orders, quarterly gross receipts comparisons, and detailed explanations of how your business qualified. Submitting a generic response without substantiation rarely succeeds.
• Assuming the IRS made a mistake simply because you didn’t get the refund. While many legitimate ERC claims have been incorrectly disallowed, some were genuinely invalid. A professional review of your original eligibility is an important first step before investing further resources.

The Bigger Picture: IRS ERC Disallowance Enforcement in 2026

The IRS’s introduction of the Form 907 streamlined process reflects an acknowledgment of the sheer volume of unresolved ERC disallowance cases sitting in the Appeals pipeline. With thousands of small businesses still awaiting final determinations on disallowance challenges, and many approaching their two-year litigation deadlines, the IRS faced a choice: force mass litigation or create a workable administrative safety valve. IR-2026-58 is that safety valve.

However, this development also signals that the IRS remains committed to enforcing ERC compliance standards. The agency has not backed away from its position that a significant percentage of ERC claims were improperly filed. Small businesses should expect continued scrutiny — and should ensure that any ongoing ERC dispute is handled with meticulous documentation and professional guidance.

It is also worth noting that the IRS continues to pursue criminal and civil enforcement actions against ERC promoters who filed fraudulent claims on behalf of small businesses. The U.S. Small Business Administration also offers resources for businesses navigating post-pandemic compliance challenges. If your original ERC claim was prepared by a third party, now is a good time to have an independent CPA review the underlying basis for that claim.

Frequently Asked Questions: IRS ERC Disallowance 2026

The following questions address the most common concerns small business owners have about the new IRS ERC disallowance extension process in 2026.