1. An ERC Audit Starts with the Quarter and Theory Claimed
An ERC claim must be evaluated under the rules that applied to the specific quarter. A business may have qualified for one period and failed to qualify for another, so an audit response should not treat the entire claim as one undifferentiated credit.
Eligibility Must Be Supported Quarter by Quarter
Depending on the period, an employer may have relied on:
A full or partial suspension caused by a qualifying government order
The applicable decline in gross receipts
Recovery startup business status
The IRS continues to treat ERC eligibility as period-specific. An employer should therefore identify which eligibility theory supported each quarter before preparing a broader audit response.
A government-order theory requires more than evidence that the pandemic disrupted business. The record should identify the actual order, when it applied, which operations it affected, and how the restriction produced the claimed suspension.
Likewise, a gross-receipts claim should be supported by underlying financial records for the relevant quarter and comparison period rather than by a summary spreadsheet alone.
Qualified Wages and PPP Allocation Are Separate Issues
Establishing employer eligibility does not establish that every wage included in the credit was properly claimed.
An employee retention credit audit may also examine:
Payroll records
Employee counts
Qualified health-plan expenses
Related-individual wages
Forms 941 and 941-X or other applicable employment tax returns
Quarter-specific ERC worksheets
PPP loan forgiveness documents
Other wage-based relief
An employer that received a PPP loan was not automatically disqualified from ERC. However, the same wages generally cannot be used both for PPP loan forgiveness and for the ERC.
The wage-allocation record therefore matters independently of the employer's eligibility theory.
Businesses facing broader payroll-tax examination issues may also need review under tax audits and adjustments.
2. The Audit Record Has to Match the Original Claim
Strong ERC audit defense begins by reconstructing the claim as it was filed. The eligibility theory and credit calculation should connect to contemporaneous business, payroll, and financial evidence.
Government Orders and Operational Evidence
If the claim relied on a suspension theory, useful records may include:
The specific governmental order
Dates the order was effective
Board or management records
Employee communications
Customer or vendor communications
Facility or operating records
Records showing which business functions were restricted
General public-health guidance or evidence of difficult business conditions does not necessarily establish a qualifying governmental order.
The operational record should show how the claimed restriction actually affected the employer rather than relying on a generalized statement that COVID-19 affected the business.
Gross Receipts, Payroll, and Claim Calculations
A gross-receipts or wage issue may require:
Quarterly financial records
General ledger data
2019 comparison records
Payroll reports
Employee-level wage data
Health-plan calculations
Applicable employment tax returns
PPP forgiveness applications
ERC calculation workpapers
The calculations should reconcile to the underlying records.
That can become especially important where a third-party promoter prepared the original claim. An employer responding to an IRS examination should understand the theory and numbers submitted on its behalf rather than rely solely on the preparer's conclusion.
If review identifies fabricated orders, false records, or intentional misstatements rather than an eligibility or calculation dispute, the matter may require separate criminal tax defense analysis.
3. A Disallowance Creates a Different IRS Dispute
An audit, document request, and claim disallowance are different procedural stages. Once the IRS disallows an ERC claim, the employer must address the stated grounds while protecting administrative and litigation deadlines.
Letter 105-C and Letter 106-C
Letter 105-C generally notifies the taxpayer that an ERC claim was disallowed. Letter 106-C generally reflects a partial disallowance, although the IRS may also use it when the ERC is fully disallowed but another adjustment on the return is allowed.
The letter should be reviewed for:
The affected tax period
Amount disallowed
Reason for the determination
Date of disallowance
Supporting documentation requested
Appeal rights
Refund-suit deadline
The IRS generally encourages taxpayers who disagree with an ERC disallowance to submit supporting information promptly, including within 30 days in the procedures described for Letters 105-C and 106-C. That response period should not be confused with the separate two-year period associated with refund litigation.
A useful response addresses the IRS's actual disallowance theory. If the issue is the absence of a qualifying government order, the response should connect the identified order to the claimed operational effect. If the issue is gross receipts, the records should reconcile the disputed quarter to the comparison period. If the issue is wage duplication, PPP and payroll records should address the allocation directly.
Recent Law Changes Can Affect Older ERC Claims
The age of an ERC claim does not necessarily mean IRS review has ended.
P.L. 119-21 prevents allowance or refund of ERC claims for the third and fourth quarters of 2021 unless the claim was filed on or before January 31, 2024. The legislation also extended the assessment period for those quarters to six years after the credit was claimed or the original return was filed, whichever is later.
The filing date, quarter involved, and procedural posture should therefore be checked before assuming an older ERC claim is outside IRS examination or assessment authority.
4. Appeals Can Continue While the Refund-Suit Deadline Runs
Administrative review does not eliminate the need to track federal litigation deadlines. This is one of the most important procedural issues after an ERC disallowance.
IRS Independent Office of Appeals
An employer that disagrees with the IRS may seek review through the Independent Office of Appeals when the applicable procedure permits.
An ERC appeal may require:
A written protest
Quarter-specific eligibility analysis
Government-order evidence
Gross-receipts reconciliation
Wage and PPP allocation records
Correction of calculation issues
Responses to the stated disallowance grounds
An effective appeal should connect each IRS position to the evidence and legal basis supporting the employer's response.
As of August 29, 2026, the IRS reported approximately 3,600 ERC claims under audit, 5,300 awaiting review of disallowance responses, and 1,400 with the Independent Office of Appeals.
The Two-Year Period and Form 907
The deadline problem becomes particularly important after a Letter 105-C or 106-C.
The IRS states that taxpayers generally have two years from the date of the original claim-disallowance letter to file a refund suit. Requesting an administrative appeal does not, by itself, extend that period.
Potential refund litigation may proceed in the appropriate U.S. District Court or the U.S. Court of Federal Claims.
In April 2026, the IRS announced a streamlined Form 907 process for certain ERC disallowance cases. The streamlined process generally applies when a taxpayer has responded to a Letter 105-C or 106-C, is still awaiting IRS review of that response, and has six months or less remaining in the two-year period.
Form 907 is not a unilateral automatic extension. It is a written agreement between the taxpayer and the IRS, and both sides must sign it before the existing period expires. The extension is not effective until the IRS has countersigned the agreement.
An unresolved appeal should therefore be reviewed together with:
The date of the original disallowance
Time remaining in the two-year period
Status of the administrative response
Whether the streamlined Form 907 process applies
Whether refund litigation must be preserved
5. Frequently Asked Questions
What documents does the IRS request in an ERC audit?
The records depend on the issue under review. Common materials can include government orders, financial records, payroll reports, employment tax returns, PPP forgiveness records, employee-level wage information, health-plan calculations, and documents showing how the business satisfied the claimed eligibility test.
What should I do after receiving an ERC disallowance letter?
Identify whether the IRS issued Letter 105-C or 106-C, the affected quarter, amount, reason for disallowance, letter date, response instructions, and remaining refund-suit period. The next step may involve additional documentation, an Appeals request, or planning for federal refund litigation.
Does an IRS appeal extend the deadline to file an ERC refund lawsuit?
Generally, no. An administrative appeal does not automatically suspend the two-year refund-suit period. In qualifying cases, the taxpayer and IRS may execute Form 907 before the period expires to extend the time by written agreement.
02 Oct, 2026
