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What to Do If the IRS Denies Your ERC Claim

IRS ERC denial appeal steps

The Employee Retention Credit (ERC) was a key relief program for businesses impacted by COVID-19, offering financial support to help keep employees on payroll. However, many business owners who filed ERC claims are now receiving IRS denial letters—either a 105C letter (full disallowance) or a 106C letter (partial disallowance).

John Milikowsky, Founder of Milikowsky Tax Law, breaks down what to do if the IRS denies your ERC claim:

 

If this happened to you, don’t panic—but do act quickly. There are clear steps you can take to dispute the denial and protect your refund.

1. Carefully Review the IRS Denial Letter

Your first step is to read the IRS denial letter in detail. The IRS has admitted that some of its previous letters did not include clear reasons for denial. If your letter lacks a full explanation, you should immediately request one from the IRS.

Common Reasons the IRS Denies ERC Claims

There are several key reasons why your claim may have been denied:

  • Failure to separate PPP loan wages – If you received a Paycheck Protection Program (PPP) loan, you must ensure that the wages used to calculate the ERC were not the same as those used for PPP loan forgiveness. The IRS will reject claims that double-count wages.
  • Your business was considered essential – The IRS may deny your claim if your business was classified as “essential” and was allowed to remain open during the pandemic. However, being an essential business does not automatically disqualify you from ERC. If you experienced partial shutdowns, supply chain disruptions, or revenue losses, you may still be eligible.
  • Insufficient documentation – The IRS may reject claims that lack proper documentation. This includes payroll records, financial statements, and evidence of government-mandated restrictions that impacted your business.
  • Misinterpretation of eligibility rules – Many businesses filed ERC claims based on incorrect guidance from third-party ERC promoters. The IRS has been aggressively auditing claims that do not meet the legal criteria.

If you believe your claim was wrongly denied, you have the right to challenge the IRS decision.

2. File a Protest Letter to Dispute the Denial

If you disagree with the IRS denial, you should file a protest letter. This is a formal written response explaining why the denial was incorrect and providing supporting evidence.

What to Include in Your Protest Letter

Your letter should be clear, detailed, and legally sound. Here’s what you need to include:

  1. A summary of your case – Clearly state that you received a 105C or 106C denial letter and that the IRS disallowed all or part of your claim.
  2. Why the IRS is wrong – Explain the specific errors in the IRS decision. Did they misinterpret your eligibility? Did they overlook critical documentation?
  3. Legal authority – Reference IRS guidelines, tax laws, or previous cases that support your position.
  4. Supporting documents – Attach payroll records, financial statements, government orders, and any other documents that prove your eligibility.
  5. Statement under penalty of perjury – The IRS requires that all protest letters include a signed declaration stating that the facts are true under penalty of perjury.

Example of Protest Letter Opening

Subject: Protest of ERC Claim Denial – Letter 105C / 106C

To Whom It May Concern,

I am writing to formally protest the denial of my Employee Retention Credit (ERC) claim, as indicated in Letter 105C / 106C dated [insert date]. The IRS has disallowed my claim on the grounds of [state reason given in denial letter], which I believe is incorrect.

A tax attorney can help draft a strong protest letter to maximize your chances of success.

3. Understand Your Right to Appeal

If your ERC claim was denied, the IRS is required to include information about your right to appeal. If this information is missing, request it immediately.

What Happens in the Appeal Process?

  • You submit a formal appeal request to the IRS Office of Appeals.
  • An IRS appeals officer reviews your case independently.
  • You may have the opportunity to negotiate a resolution before going to court.

Filing an appeal can be less costly and faster than taking legal action. However, if your appeal is unsuccessful, you still have legal options.

4. Know Your Legal Deadlines

If the IRS denied your claim and all appeal options have been exhausted, you have two years to take legal action.

You can file a lawsuit in:

  • Federal District Court
  • U.S. Court of Federal Claims

This lawsuit would be a refund claim, meaning you are suing to recover the ERC refund that the IRS wrongfully withheld.

Understanding the Two-Year Rule

  • If the IRS issued a formal denial, the two-year period begins on the denial date.
  • If the IRS has not yet denied your claim, the clock has not started yet—but you should still monitor the timeline carefully.

Missing the two-year deadline means losing your right to claim the ERC refund permanently.

5. Work with a Tax Attorney to Protect Your ERC Claim

Navigating an ERC denial can be complex and time-sensitive. A tax attorney can:

  • Review your denial letter and identify legal errors.
  • Draft a compelling protest letter with supporting documents.
  • Represent you in IRS appeals and negotiations.
  • Take legal action if necessary to recover your ERC refund.

At Milikowsky Tax Law, we specialize in IRS disputes, ERC denials, and tax litigation. Our team has helped numerous businesses fight ERC denials and recover the refunds they rightfully deserve.

Did the IRS Deny Your ERC Claim? Contact Us Today

If you received a 105C or 106C letter, don’t wait—your time to respond is limited. Our experienced tax attorneys can help you dispute the denial, file an appeal, and take legal action if needed.

Call us today for a consultation and let’s fight for your ERC refund.

Final Thoughts

The ERC program was designed to help businesses, but many are now facing unexpected IRS denials. If your claim was denied, you still have options—but you must act fast.

  • Review your denial letter for errors
  • File a protest letter with supporting documents
  • Exercise your right to appeal
  • Be aware of legal deadlines
  • Seek professional legal assistance

By taking the right steps, you can fight an IRS denial and recover the ERC refund your business is entitled to.

Questions? Milikowsky Tax Law is here to help.