Facing ERC Rejection? IRS Just Gave You More Time — Here's What It Means For Your Refund

In a move aimed at addressing mounting delays, the Internal Revenue Service has introduced a limited extension option for taxpayers whose Employee Retention Credit claims have been disallowed. The update gives certain businesses more time to resolve disputes or pursue legal action without risking the loss of potential refunds.

The change follows concerns that strict statutory deadlines were expiring before the agency could complete its review process.

A Narrow Extension Route

The IRS said eligible taxpayers can now request additional time by filing Form 907, known as an agreement to extend the time to bring suit. This allows both the taxpayer and the agency to continue administrative review beyond the standard deadline.

The option is restricted. Taxpayers must be waiting for the IRS to consider their response to a disallowance notice. They must also have six months or less remaining before the two-year deadline expires.

The IRS described the measure as a way to allow more time for cases already under consideration.

The Two-Year Deadline Explained

When an ERC claim is rejected, the IRS issues a formal notice through Letter 105-C or 106-C. From that date, taxpayers generally have two years to resolve the issue or file a refund suit in federal court.

The agency has made clear that filing an appeal does not extend this statutory deadline. Once the two-year period ends, the IRS cannot issue a refund, even if the claim is later found to be valid.

This has placed pressure on taxpayers whose cases remain under review as the deadline approaches.

Pandemic Relief and Surge in Claims

The Employee Retention Credit was introduced in March 2020 to support businesses during the Covid-19 pandemic. It allowed eligible employers to claim credits for wages paid during periods of disruption.

The programme covered wages from March 2020 to September 2021, with an extended window for recovery startup businesses until the end of that year.

The IRS has previously acknowledged a significant backlog of claims, at one stage reaching around 1.3 million. The surge was linked in part to aggressive promotion by third-party firms encouraging businesses to apply.

In response, the agency introduced stricter compliance checks, paused processing for a period, and launched voluntary disclosure and withdrawal programmes.

Concerns Over Timing and Fairness

The National Taxpayer Advocate, Erin Collins, said in a public statement that many disallowance notices were issued before full examination of the claims.

She noted that in such cases, the two-year deadline continued to run while the IRS carried out its review. According to Collins, this meant some taxpayers could lose both their refund and their right to judicial review due to delays outside their control.

The IRS said the new extension process allows more time for administrative consideration in eligible cases.

Reducing Pressure on Courts

The extension option may also limit the need for protective lawsuits. Without additional time, taxpayers may feel compelled to file cases in court simply to preserve their rights before deadlines expire.

By allowing both sides to agree to extend the timeline, the IRS can continue reviewing claims without immediate legal escalation.

This approach supports resolution through administrative channels rather than litigation.

How to Apply for More Time

To request an extension, taxpayers must complete and submit Form 907 before the original deadline expires. The agreement must be signed by both the taxpayer and the IRS.

The agency said eligible taxpayers can use the IRS Document Upload Tool to submit the form. It will also send Notice CP320B to individuals identified as qualifying for the new process, along with instructions.

Taxpayers who believe they meet the criteria but have not received a notice can still apply by following guidance available on the IRS website.

Those uncertain about their deadlines are advised to review their disallowance letters carefully and contact the IRS using the number provided in their most recent notice.

A Procedural Shift

The IRS continues to process ERC claims and related appeals. The introduction of Form 907 as an extension tool marks a procedural adjustment rather than a policy change.

For affected taxpayers, however, the impact is immediate. It offers additional time in cases where administrative review and statutory deadlines were previously on a collision course.