IRS Letter 106-C: Partial ERC Denial Explained

Letter 106-C means the IRS has reviewed your ERC claim and allowed part of it while denying the rest. This is actually better news than a full denial—you'll receive some of your claimed credit. But you still have important decisions to make about whether to accept the partial allowance or appeal for the full amount.

What Letter 106-C Means

A Letter 106-C (also called a partial disallowance) indicates that:

• Some credit allowed: The IRS determined you qualified for part of the ERC you claimed.
• Some credit denied: The remaining portion was disallowed because the IRS didn't find sufficient documentation or eligibility.
• Breakdown provided: The letter specifies which quarters and amounts were allowed vs. denied.
• Appeal rights included: You have 30 days to appeal the denied portion if you disagree.

Common Reasons for Partial Denial

The IRS typically allows some quarters while denying others when:

• Mixed eligibility periods: You clearly qualified for some quarters (e.g., during shutdowns) but not others (e.g., when restrictions lifted).
• Documentation gaps: You had strong documentation for some periods but weak or missing documentation for others.
• Gross receipts calculation: Some quarters met the revenue decline test while others didn't.
• Government order timing: Orders affected your business during specific periods but not the full claim period.
• Wage allocation issues: Some wages qualified while others were disallowed due to PPP overlap or employee count issues.

Your Options After Receiving Letter 106-C

You have several choices when you receive a partial denial:

• Accept the partial allowance: If the allowed portion seems fair and you're not confident about the denied portion, you can accept the determination.
• Appeal the denied portion: Within 30 days, you can request an appeal to IRS Appeals for the denied portion only.
• Appeal the entire determination: If you believe the calculation is wrong, you can appeal the full determination.
• Request audit reconsideration: If you have new documentation, you may be able to request reconsideration.

The 30-Day Appeal Deadline

Just like a full denial, you have 30 days to respond:

• Clock starts from letter date: The 30-day period begins from the date on the letter, not when you received it.
• Written protest required: For denied amounts over $25,000, you need a formal written protest.
• Specify what you're appealing: Your protest should clearly identify which quarters/amounts you're contesting.
• Include new evidence: Provide any documentation that supports your eligibility for the denied portion.

Should You Appeal a Partial Denial?

Consider these factors when deciding whether to appeal:

• Strength of your documentation: Do you have solid evidence supporting eligibility for the denied quarters?
• Amount at stake: Is the denied portion large enough to justify the time and potential cost of an appeal?
• Reason for denial: Was the denial based on missing documentation you can now provide, or a fundamental eligibility issue?
• Cost-benefit analysis: Professional help for appeals has costs—weigh these against potential recovery.