IRS Disallowance Letters: How to Protect Your Refund Rights

Key Takeaways

• Letters 105C and 106C signal that the IRS has fully or partially disallowed a refund or credit claim.
• Taxpayers generally have two years from the notice date to file a refund suit.
• Filing an appeal with the IRS does not pause that two-year deadline.
• If the deadline passes without a lawsuit or Form 907 extension, refund rights may be permanently lost.
• Taxpayers should track the lawsuit deadline separately from any administrative appeal process.

Receiving mail from the IRS can be scary, and it’s understandable that you might not want to open it right away. However, any communication from the IRS deserves immediate attention. Many IRS notices carry strict deadlines set by federal statute, and missing one of those deadlines can permanently close off options for a taxpayer to resolve their tax issues.

IRS Notices Disallowing Claims for Credit or Refund

Many notices carry a statutory deadline. Two notices dealing with refund claims should be highlighted, as there is a strict two-year deadline:

• LTR 105C: a full disallowance of a refund claim
• LTR 106C: a partial disallowance of a refund claim

The IRS issues these letters when it rejects all or part of a credit or refund claimed on a tax return. Essentially, the government is formally telling a taxpayer that it disagrees that the taxpayer is eligible for that credit or is owed a refund. Responding to these types of notices quickly is critical to preserving your rights as a taxpayer.

What Should You Do When the IRS Sends a Formal Claim Disallowance?

When the IRS sends a formal claim disallowance, and you agree with the Service’s determination, then nothing else needs to be done.

However, if you disagree with the IRS, you generally have two time-sensitive options:

1. Protest and Appeal
2. File a Lawsuit

Protest and Appeal

A taxpayer can protest the disallowance by sending in a written response with supporting documents back to the address on the letter. This written response is a request for the IRS to forward the claim for credit or refund to the Independent Office of Appeals (Appeals), which provides an administrative review of your claim or refund by an Appeals Officer.

The timeframe to respond is important when a taxpayer plans to protest the disallowance. Unless the letter states otherwise, a protest is generally required to be submitted within 30 days from the date of the letter. Failure to file a protest within this timeframe will result in the loss of your right to an administrative review by Appeals. However, you generally still have the right to file a federal lawsuit within the two-year period.

File a Refund Suit

Alternatively, a taxpayer can decide to file a formal suit in a local US District Court that has jurisdiction or with the US Court of Federal Claims. A taxpayer has two years from the date of the letter to file a suit. In order to file a lawsuit, though, a taxpayer must completely pay the underlying tax liability, including any related penalties or interest.

Does an IRS Appeal Pause the Two-Year Refund Suit Deadline?

The moment the IRS mails a formal notice of claim disallowance, the strict two-year statutory countdown begins. However, the trap for taxpayers is that filing a protest with the IRS Independent Office of Appeals does not pause the two-year clock. Only two things will: filing a federal lawsuit or securing a fully executed extension through Form 907.

If that two-year window ends without either of those actions taken, the credit and/or refund is permanently lost. Even if the IRS later reviews the claim and agrees that the taxpayer was correct and entitled to the credit or refund, the federal statutes stop the IRS from issuing a refund check.

With that in mind, taxpayers who protest still need to track the two-year deadline separately and act before it expires.

How Can Taxpayers Extend the Two-Year Period?

A taxpayer can protect their rights to their claim for credit or refund by requesting an extension by filing a Form 907, Agreement to Extend the Time to Bring Suit. This extension allows a taxpayer to preserve their right to eventually file a federal lawsuit against the IRS in the future if the IRS continues to deny their claim for credit or refund. This extension is recommended if there are 6 months or less remaining in the two-year period to file suit.

Where Do You File Form 907?

If a taxpayer has been assigned an Appeals Officer because they prepared a protest to the Independent Office of Appeals, then they will submit their Form 907 directly to their assigned Appeals Officer. If there is no Appeals Officer, and the claim stems from a claim for the Employee Retention Credit, a taxpayer may submit this through the IRS Document Upload Tool.

Get Help Navigating IRS Refund Claim Deadlines

At the end of the day, receiving a Letter 105C or 106C is not the end of the road, but it is a race against time to preserve your rights as a taxpayer. EisnerAmper’s Tax Controversy and Dispute Resolution practice has experienced professionals who can assist taxpayers in navigating IRS deadlines. If you have received a notice from the IRS, contact a member of our team below to see how we can assist.