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An IRS 105C is a formal notification that your ERC claim has been completely disallowed for a given quarter.
In other words, the IRS has decided you were not eligible to claim the Employee Retention Credit at all for that time period. This denial cancels out your refund or credit in full.
A full ERC disallowance like this usually stems from the IRS believing that your business didn’t meet the eligibility tests. For example, they may conclude you did not have the required decline in gross receipts, or that your company wasn’t impacted by a valid government order.
Sometimes the IRS disallows claims simply because they don’t have the full context: records of local shutdown orders may not be in their system, and they often use annualized revenue data that doesn’t reflect quarter-by-quarter changes.
Business owners receiving a 105C letter should not panic, but must act quickly. You generally have 30 days to file a written protest, and two years from the date on the notice to file a lawsuit if necessary.
The protest should include detailed documentation: copies of government orders that suspended your operations, clear quarterly financial records, payroll registers, and worksheets showing how you calculated your ERC.
You should also explain how you avoided double-counting wages with PPP loans and excluded related individuals where required.If you disagree with the IRS, you can request review through Appeals, but keep in mind that the Appeals process does not stop the two-year lawsuit deadline from running.
An IRS 106C is similar to the 105C but less severe, it represents a partial ERC disallowance. The IRS agrees with part of your ERC claim but rejects the rest. You may still receive some refund, but not the full amount you claimed.
The most common reason for a partial disallowance is related to how wages were calculated. The IRS might think you went over the per-employee cap ($5,000 in 2020 or $7,000 per employee per quarter in 2021), or that certain workers should not have been included (for example, family members or employees who weren’t providing services).
Errors in payroll calculations or misunderstandings about which wages qualify often trigger a 106C notice.
If you receive an IRS letter 106C, review your calculations carefully. Gather your payroll records, employee counts, and any worksheets showing how you applied the ERC rules.
Be ready to demonstrate that you excluded ineligible wages and properly allocated PPP wages.
Submit a clear, written protest within the timeframe given, typically about 30 days, and remember that, as with the 105C, you still have two years from the letter date to file a lawsuit if the dispute is not resolved.
The key is to provide accurate, easy-to-understand documentation that proves your claim was correct.
The IRS 6577C is particularly stressful because it comes after you’ve already received your ERC refund.
This notice says the IRS believes your refund was too large and is now seeking to claw it back. This is often referred to as an ERC recapture.
The IRS uses payroll tax filings like Form 941 to estimate employee counts and wages. Because Form 941 only captures one pay period snapshot, the IRS may think you didn’t have enough wages to support the ERC you claimed.
This can lead to an employee retention credit disallowance after the fact, even though your full-quarter payroll records prove otherwise.
If you get an IRS letter 6577C, time is critical. Most businesses have only about 21 days to respond. You should immediately pull complete payroll records for the quarter in question, not just summaries, and send them with a clear explanation.
Show that the IRS’s “snapshot” missed turnover, seasonal changes, or other wage variations.
If you stay silent, the IRS will proceed with assessing the tax back, plus penalties and interest. A timely, well-supported response gives you the best chance of keeping your refund.
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