IRS Letters

IRS Letter 106-C: Your ERC Claim Was Partially Disallowed — What to Do (2026)

By Angeline Balsitis, EA · Reviewed by Melissa Ly, Chief Tax Officer · Published July 5, 2026 · Updated July 7, 2026 · Editorial Standards

You waited months — maybe years — for the ERC refund a preparer told you was locked in. Now a Letter 106-C says the IRS agrees with some of your quarters and rejects the rest, and you're not sure whether you just lost tens of thousands of dollars or whether you can still fight.

You can still fight — but a Letter 106-C is one of the few IRS letters where doing nothing quietly and permanently kills a legal right. The image below shows you exactly what this letter looks like and where to find the two numbers that matter most: the disallowed amount and the letter date that starts your clocks.

Why you got a Letter 106-C

A Letter 106-C means the IRS reviewed a refund claim you filed — usually an Employee Retention Credit claim on Form 941-X — and allowed part of it while formally denying the rest. Unlike its sibling Letter 105-C, which rejects the entire claim, the 106-C is a split decision: some quarters passed the IRS's screening, and some didn't.

The letter states the reason for each denial. In the ERC batches the IRS has been mailing since 2024, the most common ones are:

• Gross receipts didn't decline enough. Your revenue drop in the denied quarter didn't meet the threshold for that year, even if another quarter did.
• The government-order suspension wasn't substantiated. The IRS didn't accept that a specific federal, state, or local order fully or partially suspended your operations in that quarter. Vague "supply-chain disruption" theories pushed by promoters fail here constantly.
• Wage overlap. The same wages were counted for PPP loan forgiveness or another credit, or the calculation included owner and family wages that don't qualify.
• The business wasn't eligible for that period at all — for example, quarters outside the ERC's covered 2020–2021 window.

The critical mindset shift: a 106-C is not a bill and not an audit. It's a legal determination on a refund claim, which is why the rights and deadlines it triggers look nothing like an ordinary balance-due notice. (If you're staring at a different IRS envelope and just want orientation, start with our guide to why did I get a letter from the IRS — this page covers the 106-C specifically.)

The two clocks a Letter 106-C starts

A Letter 106-C starts a 2-year period to file suit on the disallowed portion, and a much shorter window to request an IRS appeal. The trap most people fall into is assuming the appeal pauses the court deadline. It doesn't — the 2-year suit clock keeps running while Appeals reviews your case. If Appeals is slow (and with the IRS workforce down roughly 27% since 2025, it often is), you can run out of court rights while waiting politely for an answer.

There's a fix for that: Form 907, a written agreement between you and the IRS to extend the 2-year suit period. Our Form 907 ERC guide walks through when and how to use it.

What a partial disallowance looks like in dollars

Say you ran a small two-employee cleaning company before retiring, and in 2023 a promoter filed Form 941-X claims for three quarters of 2021 — $18,200 per quarter, $54,600 total. Now, living on Social Security, you open a Letter 106-C. Here's how the math splits:

• Allowed: Q1 2021, $18,200 — your gross receipts that quarter fell far enough to qualify. That portion of the claim survives.
• Disallowed: Q2 and Q3 2021, $18,200 each — $36,400 denied because receipts recovered and the "government order" the promoter cited didn't actually suspend your operations in those quarters.

What happens to the $36,400 depends entirely on whether it was ever paid out. If it wasn't, your worst case is losing money you never received — painful, but nothing to repay. If the IRS refunded it before deciding to disallow it, the IRS will move to get it back, with interest accruing on top — and on a fixed Social Security income, that changes which response path makes sense. Either way, the promoter's contingency fee (often 15–25% of the claim) is a separate fight between you and the promoter; the IRS doesn't care who kept what.

What happens if you ignore a Letter 106-C

Ignoring a Letter 106-C ends one of two ways, depending on whether the disallowed money already reached your bank account. Neither path involves the IRS forgetting.

If the denied portion was never paid out, the sequence is quiet but final:

1. The appeal window on your letter closes. The easy, no-court review path is gone.
2. The 2-year suit period runs. During this time you can still sue or sign Form 907 — the claim is dormant, not dead.
3. The 2-year deadline expires. The disallowed portion is gone permanently. No appeal, no lawsuit, no reconsideration can bring it back — even if every dollar was legitimately owed to you.

If the denied portion was already refunded to you, the sequence gets louder instead of quieter:

1. The IRS assesses the amount to be recovered and bills you for it, with interest accruing from the start.
2. Balance-due and reminder notices arrive, each with a larger total than the last.
3. Collection escalates to a final notice of intent to levy — Letter 1058 or its LT11 equivalent — which starts a 30-day clock before the IRS can levy bank accounts and garnish income.

One 2026 reality worth naming: the IRS answers fewer calls than ever, but the notice and levy systems are automated. Silence from the IRS never means the file is closed.

Your options after a partial ERC disallowance

You have four realistic paths after a Letter 106-C, and they aren't mutually exclusive — appealing now and preserving your court rights with Form 907 later is a common combination. Our pillar guide to an ERC claim disallowed covers the whole landscape; here's how the paths compare for a partial denial:

If you go the protest route, precision matters more than passion. Appeals officers respond to quarter-by-quarter substantiation — receipts comparisons with source documents, the exact text of the government order and how it restricted your operations, payroll records tying qualified wages to eligible periods. Our ERC disallowance appeal guide covers what a protest letter needs to contain.

How to respond to Letter 106-C, step by step

1. Read the disallowance breakdown — identify exactly which quarters and dollar amounts were allowed, which were denied, and the reason the IRS gives for each denial.
2. Circle the letter date — that date starts your 2-year deadline to file suit and anchors the shorter appeal window printed on the letter — keep the letter and the envelope.
3. Pull your eligibility proof — gather gross-receipts records, the specific government orders you relied on, payroll records, PPP forgiveness paperwork, and everything your preparer or promoter gave you for the denied quarters.
4. Choose your path in writing — accept the partial disallowance, send a written protest to Appeals before the letter's deadline, or preserve your court rights with Form 907 or a timely suit.
5. Get a professional review before you protest — a weak or incomplete protest builds a bad record while the 2-year clock keeps running — have an experienced tax professional check your eligibility math first.

Do you have to repay ERC money you already received?

You only owe money back on a Letter 106-C if the disallowed portion was already refunded to you. That's the single most important fact to establish on day one, because it decides whether your problem is a lost refund or a growing debt.

If repayment is on the table, interest accrues on the recovered amount until it's paid — you can estimate what that adds with our IRS penalty & interest calculator. You don't have to write one check: installment options exist, and our guide for people who can't repay ERC walks through them, including what changes when your income is fixed, like Social Security.

Two related wrinkles worth knowing. First, if you amended your income-tax return to reduce your wage deduction when you claimed the ERC, a disallowed quarter may entitle you to reverse that amendment — money moving back in your direction. Second, the IRS has an extended ERC assessment window for Q3 and Q4 2021 claims — under the 2025 One Big Beautiful Bill Act, up to six years (the later of April 15, 2028, or six years from when the claim was filed) — so "they haven't billed me yet" is not the same as "they can't."

And if a promoter filed the claim and has since gone quiet, the deadlines still belong to you, not them. Our guide to ERC mill claim problems covers how to disavow promoter positions, respond in your own name, and — where the paid-out claim was clearly wrong — whether the IRS's voluntary disclosure terms can reduce what you repay.

When you can handle this yourself

You don't need professional help to accept a partial disallowance you agree with. If the denied quarters were a promoter's stretch — a supply-chain theory you never believed, receipts that plainly didn't drop — and nothing was paid out, keeping the allowed quarters and letting the rest go is a perfectly rational, zero-cost ending. Verifying the allowed portion arrives is the only follow-up.

Experienced help changes outcomes in four situations: the disallowed amount is large and your eligibility evidence is genuinely strong; the denied portion was already paid out and repayment would strain you; Appeals is dragging while your 2-year clock runs (the Form 907 / suit decision has real legal consequences); or the 106-C arrived alongside an exam of other quarters, where our ERC audit guide applies. In those cases, the cost of getting the protest or the timing wrong dwarfs the cost of getting it reviewed.

Terms on your Letter 106-C, decoded

• Claim disallowance — the IRS's formal legal denial of a refund claim; "partial" means only part of what you claimed was denied.
• IRC §6532 two-year period — the federal statute giving you 2 years from the disallowance notice to file suit; after that, courts can't hear the claim.
• Written protest — the formal letter requesting review by the IRS Independent Office of Appeals, laying out the facts and law supporting the denied quarters.
• Form 907 — a signed agreement between you and the IRS extending the 2-year suit period, used when review is still pending as the deadline nears.
• Gross receipts test / government-order suspension — the two ways a quarter qualified for the ERC: a sufficient revenue decline, or operations fully or partially suspended by a specific government order.
• Form 941-X — the amended payroll return used to claim the ERC; each quarter is its own claim, which is why a 106-C can split them.

Letter 106-C questions, answered

Your next 24 hours

1. Find the letter date and the disallowed amount. Both are on page one of the Letter 106-C — the date starts your 2-year suit clock, and the amount tells you the size of the fight. Note whether the denied portion was ever actually paid to you.
2. Gather your ERC file. Form 941-X copies for every quarter, quarterly gross-receipts records, the government orders you relied on, payroll records, PPP paperwork, and everything the preparer or promoter gave you.
3. Get a free case review before the appeal window on your letter closes. Call (888) 825-7779 or use the 2-minute form — we'll tell you honestly whether the denied quarters are worth appealing, worth suing over, or worth letting go.

For the IRS's own materials, see the official Employee Retention Credit page at IRS.gov, the IRS Independent Office of Appeals, and — if IRS delays are causing you hardship — the Taxpayer Advocate Service.

This guide is general information, not tax or legal advice for your specific situation. Eligibility for IRS programs depends on individual facts and circumstances; no outcome is guaranteed.

Related: Letter 105-C (full disallowance) · ERC claim disallowed · ERC disallowance appeal · Form 907 ERC · or browse all guides.