What Just Changed
On April 30, 2026, the IRS announced an administrative extension of the appeal window for disallowed ERC claims under the One Big Beautiful Bill Act (OBBBA). Thousands of small businesses received Letter 105-C or Letter 106-C in 2024 and 2025 telling them their ERC refund was denied, with only two years from the date of the notice to file suit in federal court.
The new CP320B notice formally extends that window for affected taxpayers. If your original Letter 105-C is approaching the two-year mark, IR-2026-58 may give you additional time, but the extension is not automatic. You must respond to the CP320B notice to preserve your rights.
Which Notice Did You Receive?
Three different letters can disallow an ERC claim, and the defense path depends on which one is in your mail.
Notice CP320B is the newest of the three. It is issued under IR-2026-58 to taxpayers whose original Letter 105-C or 106-C is nearing the two-year mark. The CP320B confirms that the IRS is extending the period to file suit by an additional 180 days, but you must take action to preserve that extension.
Why So Many Claims Were Denied
OBBBA, signed in 2025, retroactively tightened the ERC for the third and fourth quarters of 2021. Claims for those two quarters that were filed after January 31, 2024 became invalid under the statute. The IRS began issuing mass disallowance notices in the second half of 2024.
The denial pattern that followed targets four common scenarios:
Late-filed Q3/Q4 2021 claims. Any amended Form 941-X filed after January 31, 2024 for those two quarters is now barred. The IRS rejects them with a Letter 105-C citing the OBBBA cutoff date.
Insufficient government order documentation. Businesses that claimed the partial suspension test must show the specific government order that affected their operations and quantify the impact. Vague references to "the pandemic" or general state advisories no longer pass review.
Gross receipts test miscalculation. The 50% (2020) or 20% (2021) decline must be measured quarter-over-quarter against the comparable 2019 quarter. Many third-party preparers used incorrect comparison periods or aggregated across quarters incorrectly.
Recovery startup business misclassification. The recovery startup business category for Q3/Q4 2021 has narrow requirements that many businesses did not meet. The IRS is aggressively denying claims that relied on this category without proper documentation of the date the business began carrying on a trade or business.
Your Three Defense Paths
Once a claim is disallowed, you have three procedural options. The right choice depends on the strength of your underlying claim, the amount at stake, and how recently the notice was issued.
Path 1: Administrative Appeal to IRS Independent Office of Appeals
You have 30 days from the date on the disallowance letter to file Form 12203, Request for Appeals Review, or to send a formal protest letter. The Office of Appeals is independent of the examination function and applies the hazards of litigation standard, meaning they will settle a case if the IRS would likely lose some portion at trial.
This is the cheapest path. There is no filing fee, no court appearance, and most cases resolve within nine months. The downside is that Appeals settles based on litigation risk, so you may not recover the full amount even if your claim was strong.
Path 2: Refund Suit in Federal District Court or Court of Federal Claims
You have two years from the date of the Letter 105-C (or the CP320B extension date) to file a refund suit. District court allows a jury trial, while the Court of Federal Claims is judge-only. Either court reviews the case de novo, meaning the IRS does not get deference for its prior determination.
This is the most expensive path but offers full recovery if you win. Expect 18 to 36 months from filing to resolution and legal fees in the $25,000 to $150,000 range depending on complexity.
Path 3: Tax Court Petition (Limited Availability)
Tax Court generally does not have jurisdiction over refund claims, but if the IRS issued a statutory notice of deficiency in connection with the ERC denial (for example, after clawing back a previously paid refund), you can petition Tax Court within 90 days. Tax Court allows the case to proceed without paying the disputed amount first, which makes it the preferred forum when available.
What to Do This Week
The defense window closes quickly. If you have any of the three notices on your desk, complete these five steps before the 30-day administrative appeal deadline runs.
Emergency Response Checklist
Deadline- Date-stamp the notice. Write the date you received it on the envelope and the letter itself. Photograph both. This protects you if the IRS challenges your timeline.
- Calendar both deadlines. The 30-day administrative appeal deadline and the two-year refund suit deadline. Add a 60-day-before-suit reminder so you have time to retain counsel.
- Pull all supporting documentation. Government orders, payroll records by quarter, gross receipts comparisons, healthcare expense allocations, and any prior preparer's workpapers.
- Order your IRS account transcript. Form 4506-T or online at IRS.gov. This shows exactly which quarters were disallowed and the amounts.
- Get a second opinion before responding. Many disallowance notices contain factual errors or apply incorrect law. A CPA or tax attorney experienced in ERC defense can often identify a strong response in the first hour of review.
Common Mistakes That Forfeit the Defense
Three errors regularly cost taxpayers their right to recover.
Do Not Do These Things
Caution- Ignoring the notice. Silence does not preserve your rights. The 30-day administrative appeal window and the two-year refund suit window both run from the date on the notice, not the date you got around to opening it.
- Sending a casual reply. A handwritten note saying "this is wrong" does not constitute a valid protest. Form 12203 or a formal protest letter is required, and the letter must address each specific ground for disallowance.
- Paying the disputed clawback before filing suit. Refund suits require full payment of the disputed amount first under the Flora rule. However, Tax Court does not, which is why establishing jurisdiction matters before you write a check.
If the IRS Already Clawed Back Your Refund
Some businesses received their ERC refund in 2022 or 2023, then received a notice in 2024 or 2025 demanding repayment with interest. This is a different procedural posture from a disallowance of an unpaid claim.
If you received a notice of deficiency (often a Letter 3219 or CP3219N), you have 90 days to petition Tax Court. This preserves your right to litigate without first paying back the disputed refund. Missing the 90-day window is a hard deadline; the only path after that is to pay in full and sue for refund in district court.
The IRS may also issue a Final Notice of Intent to Levy. If a levy notice arrives before you have filed a Tax Court petition or paid the disputed amount, request a Collection Due Process hearing within 30 days. The CDP request stops collection action and gives you a forum to dispute the underlying liability.
When the New CP320B Extension Applies
The IR-2026-58 administrative extension is available to taxpayers whose original disallowance letter was issued between July 1, 2024 and December 31, 2025, where the two-year refund suit window is approaching expiration. The CP320B notice extends that window by 180 days, but only if the taxpayer files a formal acknowledgement within 60 days of receiving the CP320B.
If you received a Letter 105-C or 106-C in that date range and have not yet seen a CP320B, contact the IRS Practitioner Priority Service to confirm whether your account is eligible. Eligibility is not automatic for every disallowance issued in that window.
What the IRS Looks for in a Successful Defense
Disallowance reversals share a few common elements. Build your response around these proof points where they apply to your business.
Strong ERC Defense Evidence
Strategy- A specific government order (federal, state, county, or city) with effective dates that overlap the quarter you claimed
- Quantified impact of that order on your operations: hours reduced, capacity limited, services suspended, with payroll allocated to affected functions
- Quarter-over-quarter gross receipts schedules comparing to the 2019 baseline, prepared from books contemporaneously with the claim
- Healthcare expense documentation aligned to qualifying wages
- Prior preparer workpapers showing the methodology, especially if you used a third-party ERC mill (their workpapers may help, hurt, or trigger a malpractice claim)
- Affidavits from operations managers describing the specific suspension and its impact
Bottom Line
The IRS is not finished with ERC disallowances. The IR-2026-58 extension is meaningful but it does not extend forever, and Appeals is still selective about which cases it will settle. Most successful defenses combine a strong administrative protest with a parallel preparation for refund suit in case Appeals does not produce a satisfactory result.
If you have a Letter 105-C, Letter 106-C, or CP320B on your desk, the worst response is to wait. The best response is to preserve every procedural right, document the underlying claim quickly, and decide on a path before the 30-day administrative window closes.
Contact TS CPA for a confidential review of your disallowance notice and a recommendation on which defense path matches your situation.