Notice 105-C means the IRS has disallowed your Employee Retention Tax credit. This may happen after you receive Notice 6612 and go through an ERC audit, or the IRS may send you this notice if it decides to disallow your credit after reviewing your return. If the IRS disallows part of your credit, they may send you Notice 106-C.
The Employee Retention Credit was extremely valuable for business owners who continued to pay their employees despite the COVID-19 pandemic affecting their revenue and/or operations. The ERC was worth up to $5,000 per employee for 2020 and up to $14,000 per employee for the first half of 2021. Depending on the number of employees and other factors, your credit may be worth anywhere from a few thousand dollars to millions.
Unfortunately, the IRS has identified a lot of risks with these credits and is disallowing ERC refunds partially or in full at very high rates. Once you receive a disallowance letter, you have up to two years to bring a refund lawsuit against the IRS to claim your credit, but if you disagree with the disallowance, you should act now to protect yourself.
To talk with an attorney experienced in dealing with ERCs, contact us at Wiggam Law today.
What is IRS Notice 105-C? ERC Claim Disallowance
The IRS sends Notice 105-C to taxpayers whose employee retention credits have been disallowed. The notice should explain why the IRS disallowed your claim – for example, you filed an amended return after the deadline, or your business didn’t meet the eligibility criteria to claim the credit.
The letter will also outline your appeal rights, explain the two-year timeline for challenging the decision in court, and tell you what to do if you disagree with the claim.
What Is Notice 106-C?
IRS Notice 106-C means that the IRS has partially disallowed your Employee Retention Credit. The notice explains why the IRS has denied part of your credit and accepted the rest. It also explains how to respond based on whether you agree or disagree with the disallowance.
Does Notice 105-C Mean My Business Was Ineligible to Claim the ERC?
Although this notice says that the IRS has disallowed your ERC claim, it doesn’t necessarily mean that you were not eligible. In other words, the IRS makes mistakes. Don’t assume that the disallowance is correct until you double-check the situation.
In June of 2024, the IRS announced that it was going to process ERC claims with a high risk of ineligibility by sending disallowance letters. Just because your return showed high-risk factors does not necessarily mean that you were ineligible for the credits.
If you haven’t received a disallowance letter yet and you’re worried, you can contact us to do a risk assessment of your ERC claim. The IRS has a withdrawal process for qualifying taxpayers who want to withdraw their pending ERC claims. A Voluntary Disclosure Program is also available for a limited time for taxpayers who received a 2021 ERC erroneously and want to pay it back without worrying about penalties.
How to Check Your ERC Eligibility
Review the information in the notice and check your eligibility for the credit. If you believe that you were eligible but the IRS has disallowed some or all of the credit, you should reach out with supporting documents as soon as possible.
To claim the credit in 2020, employers must have met the following criteria:
- Full or partial suspension of operations due to government orders.
- Drop in revenue (gross receipts) of 50% compared to the same quarter in 2019 (If that applied, you could claim the ERC every quarter until your gross receipts were over 80% of the same quarter for 2019).
Here are the eligibility criteria for Q1, Q2, and Q3 2021 ERC claims:
- Gross receipts of less than 80% compared to the same quarter in 2019. However, there is an alternative quarter election rule that allows you to look at the prior calendar quarter and compare that to the same quarter in 2019.
- Gross receipts for businesses that were not in operation in 2019 declined compared to the same calendar quarter in 2020.
- Qualify as a recovery start-up business that begins operations after February 15, 2020, with average annual gross receipts under $1 million for the three-taxable-year period ending with the year that precedes the quarter the credit is determined.
If you claimed the ERC in the fourth quarter of 2021, you must meet the eligibility criteria to qualify as a recovery start-up business.
However, those are not the only rules. You also must ensure that you calculated the credit correctly and didn’t claim the credit on any wages paid with Paycheck Protection Program (PPP) loans or other forms of COVID relief. You were also prohibited from claiming this credit on wages paid to certain owner(s) relatives.
Additionally, if your business had 100 or more employees in 2019, you were only allowed to claim the credit for wages paid to employees who were not providing services in 2020. For the 2021 ERC, only employers with 500 or fewer employees in 2019 were allowed to claim the credit on wages paid to in-service employees.
To review the eligibility criteria, contact an experienced ERC attorney or check out the following resources:
- ERC 2020 Vs. 2021 Comparison Chart
- IRS FAQs About the Employee Retention Credit
- ERC Eligibility Checklist – This webpage has an interactive quiz to help you determine your eligibility.
Next Steps If You Agree With the Disallowance
If you realize that you are not eligible, you do not need to do anything. However, if you have already received your credit, you will owe a tax liability, and you must pay in full or contact the IRS to set up payments.
Generally, if your business is still in operation and you owe $25,000 or less, you can get up to two years to make payments. If you owe more or need longer to pay, the IRS may agree to let you set up an installment agreement, but you will need to file Form 433-B (Collection Information Statement for Businesses).
How to Dispute the ERC Disallowance
If you disagree with the disallowance, you should respond to the IRS within 30 days. Responding within 30 days helps to preserve your two-year right to file suit.
Send documents supporting your claim, but note whether you want to pursue an appeal. To be on the safe side, you may want to request an appeal.
Note why the 105-C stated that the credit was disallowed and find documents that specifically address that issue. For example, if your claim was disallowed because you didn’t file W-2s, you need proof of your W2s and the wages paid. You should also attach any other documents that support your general eligibility for the claim, including the following:
- Sales reports showing a decline in gross receipts between the quarter(s) you claimed the ERC and the 2019 or 2020 reference quarters.
- Copies of government orders that restricted your operations.
- A written description of your operations.
- Written explanations of how shutdown orders or decline in revenue affected your business.
- Proof that you were an eligible recovery start-up business.
- A statement that your credit was not claimed on wages paid to relatives or wages covered by a PPP loan.
If you believe that you incorrectly claimed some of the credit but that the whole thing should not be disallowed, you can also note that in your response. Include the calculations that you used and your updated credit value. You should exercise caution in how you respond to these notices as it may limit your options in Federal District Court or the Federal Court of Claims. It is highly recommended you consult with an attorney if you receive a claim disallowance letter.
What to Expect After You Respond to Letter 105-C
When you send in your response, the IRS will review the documents and explanations you have provided. If the IRS employee agrees with your argument, they will reinstate some or all of the credit, depending on the details you provided. In this situation, they will not forward your materials to appeals even if you requested an appeal.
However, if the IRS employee disagrees with your argument and you requested an appeal in your response, they will forward all of the materials to Appeals and send you Letter 86-C. Appeals will contact you directly and let you know if they need any additional information.
If the Office of Appeals agrees that your credit should be disallowed, you have the right to file suit in a United States District Court or the United States Court of Federal Claims, but you must do so within two years of receiving Letter 105-C.
If you don’t request an appeal and the IRS disagrees with your response, they will not forward your case to Appeals. Instead, they will send you Letter 916-C stating that the disallowance stands. However, in some cases, they may review your argument and request more information with Letter 3064-C.
Appeal Rights and the Two-Year Timeline
You only have two years from the date on the 105-C letter to request an appeal and/or file a formal refund claim in Federal District Court of the Federal Court of Claims. Requesting an appeal does not toll or extend this time, but you may be able to extend the deadline by filing Form 907 (Agreement to Extend the Time to Bring Suit).
Note that if the two-year deadline is approaching and the Court of Appeals is still reviewing your case, you may need to file suit or extend the timeline so that you can still claim a refund.
Unfortunately, even if Appeals has issued a positive decision but has not yet issued your refund, you may need to file suit to preserve the refund. Talk with an attorney if you’re in this situation.
Getting Help From an Experienced Tax Attorney
If you have received Notice 105-C, you will either need to send in a disagreement letter with supporting documents or deal with the fact that you have lost this valuable credit. In both cases, you may want to reach out to a tax attorney.
An experienced tax resolution specialist can help you review your eligibility and respond to Letter 105-C. They can also help you request an appeal or file a refund suit with the courts if needed. If you agree with the disallowance and are facing an unexpected tax liability, an attorney can help you set up payments, negotiate a settlement, or make other arrangements with the IRS.
To get help today, contact us at Wiggam Law. We are experienced ERC attorneys who can help you deal with every aspect of the process, from disputing a disallowed credit to audit representation to filing a refund suit. Call us at (404) 233-9800 or fill out our online consultation form to schedule a meeting with us today.