October DealsAmazon USOctober deal check: compare before you payAmazon US: current deals, useful picks and tech finds.Check DealsSlow PC?RecommendedPC slow today? Run a repair scan before it gets worseResolve common Windows issues and optimize system performance.Scan NowOctober DealsAmazon USDeal season is back - check today's better picksAmazon US: current deals, useful picks and tech finds.See Picks×
Skip to content
The Finance Base
The Money Desk · Blog
Re:

ERC Audits in 2026: How to Defend Pandemic-Era Credit Claims

A practical guide to defending an ERC claim: match evidence to the IRS notice, document eligibility and wages by quarter, and track disallowance deadlines.
From TheFinanceBase Team7 min to read
Special offer. See more information about Outbyte and uninstall instructions. Please review EULA and Privacy policy.

If the IRS audits your Employee Retention Credit (ERC) claim, organize your response by tax quarter and answer the exact issue in the IRS notice. Match each eligibility argument to supporting records, reconcile the credit calculation to payroll and tax returns, and track any deadline to challenge a disallowance separately from the audit response.

Start with the notice, quarters and amounts at issue

Read the entire IRS notice before assembling records. Make a working list of each disputed quarter, the amount challenged, the IRS’s stated reason and the response date or procedure described in the notice. A claim can involve different eligibility grounds or calculation issues in different quarters, so a single explanation for the whole claim may not answer what the IRS is asking.

The IRS’s instructions for Letter 106-C, which addresses a partial disallowance, call for a written explanation and supporting documentation for each disputed quarter that responds to the specific reason for the adjustment. Letter 105-C concerns disallowance of the ERC. Use the instructions and submission method for the notice you received; do not assume that an audit response, an appeal and a refund suit use the same process.

IRS communication What to focus on IRS guidance
Letter 106-C Explain why you disagree with the partial disallowance, quarter by quarter, and support the disputed amount and reason with records. IRS, “If you receive Letter 106-C about the Employee Retention Credit”
Letter 105-C Address the stated basis for disallowance. For example, substantiate reported wages or provide evidence that a Q3 or Q4 2021 claim was timely filed if that is the issue. IRS, “Understanding Letter 105-C, Disallowance of the Employee Retention Credit”

Keep a copy of what you send and proof of how and when you submitted it. If a notice does not clearly identify the reason or amount in dispute, ask a qualified tax professional to help interpret it before drafting a response.

Special offer. See more information about Outbyte and uninstall instructions. Please review EULA and Privacy policy.

Build an evidence file that follows your eligibility theory

There is no universal set of records that proves every ERC claim. Select records that establish the eligibility ground for the particular quarter, connect it to your business and support the amount claimed. The IRS’s ERC overview says the credit concerns eligible businesses and tax-exempt organizations with employees affected during the pandemic; it is not available to individuals.

If you rely on a government order

Include the actual order from the appropriate governmental authority and identify the specific provision you say required a full or partial suspension of your operations. Then explain how that provision affected your own business during the quarter at issue. Contemporaneous records of the affected operations can help show the connection between the order and your circumstances.

The IRS says the order must be due to COVID-19 and must mandate a full or partial suspension. A recommendation, guidance, statement or policy that did not mandate suspension is not enough under its stated guidance. General pandemic disruption, customer caution or a supply-chain problem does not automatically establish eligibility on this theory.

If you rely on a decline in gross receipts

Prepare a quarter-by-quarter comparison showing the receipts figures used and the calculations behind the claimed decline. Apply the eligibility rules for the specific year and quarter; do not assume the same test applies to every period. The IRS’s ERC eligibility checklist and FAQs provide the applicable rules and exceptions. The records and figures supporting your comparison should let the IRS follow how you reached each result.

Special offer. See more information about Outbyte and uninstall instructions. Please review EULA and Privacy policy.

Make the wage calculation traceable

Reconcile the ERC calculation to payroll and employment-tax records for every quarter in dispute. Include the worksheets used to determine qualified wages and eligible health-care expenses, how employee counts were applied, and how caps and exclusions were handled. The goal is to make each reported amount traceable from the claim calculation back to source records.

  • Include payroll records and employment-tax filings supporting the wages reported and the employees involved.
  • Show how eligible health-care expenses were determined and allocated in the calculation.
  • Identify wages used for Paycheck Protection Program loan forgiveness and exclude them from the ERC calculation.
  • Address wages paid to related individuals when those wages are excluded under the applicable IRS rules.
  • If the IRS says the credit exceeds the per-employee maximum, provide the employee count, calculation and worksheets, and show that prohibited wage categories were excluded.

For large-employer rules, the IRS’s Letter 106-C examples use more than 100 full-time employees in 2019 for 2020 periods and more than 500 for 2021 periods. If those rules apply to your claim, include records supporting the employee count and, where relevant, showing that claimed wages were paid to workers who were not providing services.

Respond to the specific issue in a disallowance

Use the reason stated in the notice to decide which evidence belongs in the response. Examples in IRS Letter 105-C guidance include a dispute over whether the employer reported wages on Forms W-2 and whether a Q3 or Q4 2021 claim was filed by the statutory cutoff.

  • If the IRS says wages were not reported on Forms W-2: provide records supporting that the business had employees, filed Forms W-2 and paid the qualified wages at issue.
  • If the IRS questions whether a Q3 or Q4 2021 claim was timely: provide evidence of timely mailing or submission, such as applicable mailing documentation.

For a partial disallowance, explain the disputed amount and the reason you disagree for each affected quarter. Focus the explanation on the adjustment in the notice rather than resubmitting an unstructured file of records.

Free tools Windows power users keep installed

One-click scans. No signup required.

Special offer. See more information about Outbyte and uninstall instructions. Please review EULA and Privacy policy.

Reconcile employment-tax and income-tax records

Include completed Forms 7200 that you submitted, along with completed federal employment and income tax returns related to the claim. The IRS says ERC reduces wage expense for the year the qualified wages were paid or incurred. Its FAQ describes a possible correction where a claim was paid in a later year and the wage expense was not reduced, but treatment can differ when wages were capitalized or the credit did not actually reduce tax liability. Review your own facts and current IRS guidance; do not assume that every ERC recipient must amend an income-tax return.

Track the separate deadline after a disallowance

The IRS says the general deadline to resolve a claim administratively or bring a refund suit in federal court is two years from the date of Letter 105-C or 106-C. The exact deadline depends on the notice and the taxpayer’s circumstances, so calculate it from your own notice and get qualified advice promptly.

Requesting review by the IRS Independent Office of Appeals does not extend the statutory two-year period. The IRS says it cannot issue a refund after that period even if it later agrees with the taxpayer. Depending on the case and applicable deadline, the routes described by the IRS include an administrative appeal or a suit in the U.S. District Court with jurisdiction or the U.S. Court of Federal Claims.

Limited Form 907 process announced in 2026

In April 2026, the IRS announced a submission route for certain taxpayers awaiting consideration of a response to Letter 105-C or 106-C who have six months or less remaining in the two-year period. A request is not an approved extension: Form 907 is effective only if both the taxpayer and an authorized IRS representative sign it before the original deadline. The IRS says eligible taxpayers may submit a request through its Document Upload Tool using the CP320B selection, and that a taxpayer may be eligible without receiving Notice CP320B. Check the current IRS instructions and your case-specific deadline; do not treat submission alone as extending the period.

Special offer. See more information about Outbyte and uninstall instructions. Please review EULA and Privacy policy.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Support on Ko-Fi

Check the special filing bar for Q3 and Q4 2021

A separate statutory rule applies to certain late-filed Q3 and Q4 2021 ERC claims. Section 70605(d) of Public Law 119-21, effective July 4, 2025, prevents allowance or refund of those claims if they were filed after January 31, 2024, even if the taxpayer otherwise met ERC eligibility requirements. The IRS says a claim postmarked and properly mailed, or submitted to the appropriate IRS office, by January 31, 2024 is treated as timely for this purpose.

This filing bar is distinct from an IRS finding that an employer did not qualify. If you received Letter 105-C and believe your claim was timely filed but was disallowed under this rule, the IRS says you may appeal. Evidence of timely mailing or submission is central to that issue.

Know which options are—and are not—current

The IRS’s second ERC Voluntary Disclosure Program closed on November 22, 2024. Under its terms, some eligible participants with qualifying 2021 periods could repay 85% of the credit, but exclusions applied, including to certain taxpayers under examination or with claims already reversed or disallowed. It is not an open relief option in 2026.

The IRS overview says employers may withdraw certain unpaid claims, including a check not yet cashed or deposited. Withdrawal eligibility depends on the facts; consult the current IRS withdrawal guidance and FAQs before treating it as an option. For an already disallowed claim, follow the relevant Letter 105-C or 106-C procedures.

Special offer. See more information about Outbyte and uninstall instructions. Please review EULA and Privacy policy.

What the IRS’s 2026 claim inventory does—and does not—show

For the week ending August 29, 2026, the IRS reported approximately 14,900 ERC claims remaining in its inventory: 1,650 under review, 2,950 pending payment or disallowance, 3,600 under audit, 5,300 awaiting review of disallowance responses and 1,400 with the Independent Office of Appeals. These are workload counts, not a forecast of any employer’s audit risk or evidence about the likelihood of a particular defense succeeding.

ERC examinations can involve quarter-specific eligibility rules, payroll calculations and short procedural deadlines. A tax attorney or CPA with ERC and employment-tax examination experience can help assess the notice, organize a response and track deadlines. Verify the professional’s relevant qualifications and experience before engaging them.

Product prices and availability are accurate as of the date/time indicated and are subject to change. Any price and availability information displayed on Amazon at the time of purchase will apply.

Leave a Reply

Your email address will not be published. Required fields are marked *

Special offer. See more information about Outbyte and uninstall instructions. Please review EULA and Privacy policy.

More post from the Money Desk

  1. The Money DeskBlogTheFinanceBase09 OCT 267 minMortgage Escrow FAQs: Taxes, Insurance, Shortages, and Refunds
  2. The Money DeskBlogTheFinanceBase09 OCT 265 minHow Mortgage Escrow Accounts Work and What Homeowners Pay For
  3. The Money DeskBlogTheFinanceBase09 OCT 265 minHow to Read a Stock Chart, Volume and Market-Cap Data
Recommended PC Tool
Recommended PC Tool
PC Slower Than It Used to Be?Free scan - under a minute
Crashes, No Sound, or Screen Glitches?Free driver scan

Two free Windows tools

One Free Minute Could Fix That PC

Before you go - each of these free tools takes about a minute and tackles what quietly slows a Windows PC down.

Special offer. View Outbyte info, uninstall instructions, EULA, and Privacy Policy.