ERC Claim Denied: Your Complete Guide to Next Steps

Having your Employee Retention Credit claim denied is frustrating—especially when you believed you qualified. But a denial isn't necessarily the final word. Understanding why your claim was denied and knowing your options can help you decide the best path forward. Many businesses successfully overturn ERC denials through the appeals process.

Common Reasons for ERC Denial

Understanding why your claim was denied is the first step in deciding whether to appeal. The IRS denies ERC claims for several reasons:

• No qualifying government order: The most common denial reason. The IRS may determine that no federal, state, or local order actually suspended your operations or significantly impacted your business.
• Essential business exception: If your business was classified as essential, you may not qualify unless you can prove a partial suspension through capacity limits, supply chain disruption, or other documented impacts.
• Insufficient documentation: You didn't provide adequate evidence to prove eligibility, such as the specific government orders that affected you or how operations were impacted.
• PPP wage overlap: You used the same wages for PPP loan forgiveness and ERC, which isn't allowed.
• Gross receipts calculation errors: Your quarterly revenue decline didn't meet the required thresholds when properly calculated.
• Recovery startup business issues: You claimed as a recovery startup but didn't meet the specific requirements for this category.

Which Denial Letter Did You Receive?

The type of denial letter you received affects your options:

• Letter 105-C (Full Disallowance): Your entire claim was denied. You have 30 days to appeal and 2 years to file a lawsuit.
• Letter 106-C (Partial Disallowance): Some quarters or amounts were denied while others were allowed.
• 3853-C Letter: A preliminary examination letter requesting your response before formal denial.

Your Appeal Options

You have several paths to challenge an ERC denial:

1. IRS Appeals: Request a conference with the IRS Independent Office of Appeals within 30 days. This informal process often resolves disputes without litigation.
2. Audit Reconsideration: If you have new information or documentation that wasn't previously considered, you can request the IRS reconsider its determination.
3. Federal Court Lawsuit: File a refund suit in U.S. District Court or the Court of Federal Claims within 2 years. This is the most formal (and expensive) option.
4. Taxpayer Advocate Service: If you're experiencing significant hardship, TAS may be able to help expedite your case.

When Should You Appeal?

Not every denial is worth appealing. Consider these factors:

• Strength of your eligibility case: Do you have solid documentation proving you met the ERC requirements?
• Amount at stake: Larger claims justify the cost and effort of appeals or litigation.
• Reason for denial: Some denial reasons are easier to overcome than others.
• New evidence available: Can you provide documentation you didn't include in your original claim?
• Cost-benefit analysis: Professional representation costs should be weighed against potential recovery.

Preparing Your Appeal

A successful appeal requires thorough preparation:

• Gather all documentation: Collect government orders, business records, gross receipts statements, payroll records, and any evidence of operational impact.
• Understand the denial reason: Your appeal should directly address why the IRS said you didn't qualify.
• Present a clear legal argument: Cite relevant IRS guidance and regulations supporting your position.
• Consider professional help: For claims over $25,000, professional representation significantly improves outcomes.