ERC Disallowance: What the Letter Means and How to Appeal

This page covers what happens after the IRS denies your ERC claim — not the audit process itself (for that, see our page on ERC audit defense) and not the initial probability of audit (for that, see our separate analysis). This is the post-disallowance phase: the letter, the deadline, the protest, and what comes next.

Received an ERC disallowance letter? Call (619) 378-3138 to talk through your options.

The Three ERC Disallowance Letters — and What Each Means

The IRS uses different letters at different stages of the ERC enforcement process. Understanding which letter you received determines your available responses and deadlines.

A note on Letter 6612: some ERC practitioners reference a Letter 6612 as an ERC-specific disallowance notice. The IRS uses internal letter numbers that can evolve during enforcement campaigns. Regardless of the letter number, the content of the letter — specifically whether it proposes or finalizes a disallowance, and what response deadline it specifies — controls your procedural options. Read the letter carefully and respond to the specific deadline stated in it.

The 30-Day Appeal Deadline: What Happens If You Miss It

The 30-day deadline on ERC disallowance letters is real and consequential.

If you respond within 30 days, your case goes to the Independent Office of Appeals. You have the right to an administrative conference with an Appeals officer who has settlement authority and can consider the "hazards of litigation" — meaning they can resolve the case for less than the full disallowed amount if the outcome in court is uncertain. IRS Appeals is where many ERC disallowances are successfully resolved.

If you miss the 30-day deadline on a proposed disallowance, the IRS's position becomes the final determination. Your remaining options depend on the type of letter and what happened after:

• If you received a Letter 105-C and missed the 30-day Appeals window, you can still file a refund suit in federal district court or the Court of Federal Claims within two years. You must first pay the assessed amount and file a claim for refund before suing.
• If the IRS assessed the disallowed amount and you did not appeal, the IRS will begin collection. A Collection Due Process (CDP) hearing — requested within 30 days of an LT 11 notice of intent to levy — is a separate proceeding that can pause collection and allow you to challenge the underlying liability, but CDP has its own procedural requirements.

The bottom line: the 30-day window is the best opportunity to resolve an ERC disallowance administratively. Missing it does not end your options, but it makes everything more expensive and time-consuming.

The IRS Appeals Process for ERC Disallowances

The Independent Office of Appeals is a division of the IRS that operates independently of the examination teams. Appeals officers have authority to settle disputes based on their assessment of the likely outcome if the case went to court — this is called the "hazards of litigation" standard. They are not bound by the examiner's position, and they approach ERC cases with more flexibility than examination teams.

Filing the Protest

To get your case to Appeals, you file a written protest within 30 days of the disallowance letter. For disputes involving more than $25,000 in tax, a formal written protest is required. It must include:

• Your name, address, and the applicable tax periods
• A statement that you want a conference with Appeals
• A copy of the disallowance letter
• An itemized schedule of the amounts at issue
• A statement of facts supporting your position, signed under penalties of perjury
• A statement of law — the legal arguments supporting your ERC eligibility

The protest is the most important document in your ERC appeal. A weak protest — one that does not provide specific facts, specific government orders, and a clear legal analysis — gives the Appeals officer nothing to work with. We build protests that lay out the eligibility case as thoroughly as a legal brief, because that is what actually moves Appeals.

What Appeals Officers Look For

In ERC cases, Appeals officers are primarily evaluating two things: whether the eligibility analysis is sound, and whether the documentation supports that analysis. Specifically:

• Government orders. Which specific federal, state, county, or municipal order applied to your business, during which quarters, and what specific operational modifications did it require? The Appeals officer will verify that the orders cited are real, applicable to your location and industry, and that they caused a suspension of more than a nominal portion of your business operations.
• Gross receipts documentation. For claims based on the revenue decline test, the Appeals officer wants to see the comparison calculations with supporting records — tax returns, financial statements, or bank records — for 2019 and the applicable ERC quarters.
• Wage documentation and PPP allocation. Payroll records for each employee included in the claim, along with documentation showing how wages were allocated between ERC and PPP loan forgiveness.
• Contemporaneous records. Documentation created at the time of operations — not reconstructed after the fact. Records showing capacity reductions, operational changes, or revenue impacts during the relevant quarters carry more weight than after-the-fact summaries.

Realistic Outcomes at Appeals

In my experience handling ERC appeals, the outcomes range considerably. Claims with strong documentation of specific government orders and clear gross receipts calculations are resolved favorably at Appeals more often than not. Claims that relied entirely on template language from ERC mills — with no business-specific analysis — are harder to defend at Appeals, but even those sometimes get partial relief if parts of the claim are legitimate.

Appeals does not guarantee success, and some cases require litigation. But Appeals is almost always worth attempting before moving to Tax Court or federal court, because the cost and timeline of administrative resolution are significantly lower than litigation.

Tax Court and Federal Court Options

If Appeals does not resolve your ERC disallowance, two litigation paths are available.

U.S. Tax Court

The Tax Court is the only federal court where you can challenge an IRS tax assessment without first paying the disputed amount. For ERC cases, you can petition the Tax Court after receiving a Notice of Deficiency — the IRS's formal assessment notice — within 90 days (150 days for overseas taxpayers). Tax Court cases can take 12 to 36 months to resolve, depending on complexity and the court's docket. The Tax Court has developed a substantial body of decisions on ERC eligibility that inform both the legal arguments and the likely outcomes. For complex ERC cases requiring litigation, our ERC litigation attorneys can represent you through trial.

Federal District Court or Court of Federal Claims

If you have already paid the disallowed amount — or received a Letter 105-C — you can file a refund suit in federal district court or the Court of Federal Claims. The two-year deadline from a Letter 105-C is a firm cutoff. These courts apply somewhat different procedural rules than Tax Court, and in some cases offer strategic advantages. The right forum depends on the specifics of your case and your litigation objectives.

The ERTC Voluntary Disclosure Program After Disallowance

If you received an ERC disallowance and the claim was largely indefensible — the government orders cited did not apply, or the eligibility analysis was template-based and wrong — voluntary disclosure may still be an option, depending on the timing.

The IRS ERTC Voluntary Disclosure Program allowed employers to repay 85% of the ERC refund received (keeping 15% to account for promoter fees paid) in exchange for closing the matter without penalties. The program has opened and closed multiple times. If the disallowance notice came before you entered the VDP and the VDP is still available, it may be worth considering as an alternative to appealing an indefensible claim.

The VDP is not appropriate for claims where you have a legitimate eligibility argument. If you file through the VDP, you are conceding the claim was improper. For claims with mixed facts — some quarters defensible, some not — a targeted appeal of the defensible quarters combined with VDP treatment of the others is often the best strategy. We evaluate this quarter by quarter.

Penalties That Come With a Disallowance

An ERC disallowance does not just mean repaying the credit. The IRS typically also assesses penalties on the disallowed amount:

• Accuracy-related penalty (IRC § 6662): 20% of the disallowed credit amount. This penalty applies when the taxpayer substantially understated the tax (or overstated the credit) due to negligence or disregard of rules and regulations.
• Fraud penalty (IRC § 6663): 75% of the disallowed amount attributable to fraud. This is the highest civil penalty and requires the IRS to prove that the taxpayer acted with fraudulent intent.
• Erroneous refund penalty (IRC § 6676): 20% of the erroneous portion of a claim for refund or credit. This applies specifically to overstated claims and can apply even when the accuracy-related penalty does not.
• Interest (IRC § 6601): Interest accrues on any amount owed from the date the original refund was paid to the date of repayment. Interest rates are set quarterly based on the federal short-term rate plus 3 percentage points.

Penalty abatement is possible. The accuracy-related penalty can be avoided if the taxpayer demonstrates "reasonable cause and good faith" — typically, reliance on the advice of a qualified tax professional who had all the relevant information. We evaluate penalty abatement arguments alongside the substantive appeal in every disallowance case.

What Documentation Actually Wins ERC Appeals

After handling dozens of ERC appeals, here is what I've seen work:

• The specific government order, not a general reference to COVID restrictions. The exact order — federal, state, county, or city — with the order number, effective date, and the specific operational requirement it imposed on your business. Not "state orders required capacity restrictions" but "San Diego County Public Health Order dated April 1, 2020, Order No. 2020-04, required food service establishments to cease indoor dining operations."
• Documentation of how the order affected your specific operations. A memorandum or business record from the relevant period — not created after the fact — showing what you actually changed. Floor plan comparisons showing reduced seating capacity. Shift schedules showing modified operating hours. Production logs showing reduced output. The more specific and contemporaneous, the better.
• Complete gross receipts documentation. Every revenue source for each comparison period, with the math shown explicitly. 2019 quarterly revenue, ERC quarter revenue, decline percentage, and the underlying records (tax returns, bank statements, financial statements) supporting each number.
• PPP allocation documentation. A clear ledger showing which wages were allocated to PPP forgiveness and which to ERC, confirmed against your PPP forgiveness application and the lender's forgiveness confirmation.

The Appeals officer is evaluating whether your claim was legitimate, based on the facts your business actually experienced. The documentation tells that story. A well-built protest with complete documentation gives the Appeals officer a path to sustain your claim — which is ultimately what they are looking for, because a settlement is less expensive than litigation for everyone.

Representative Results

Results vary based on individual facts and circumstances. Past outcomes do not guarantee future results.