IRS Letter 105C: Understanding Complete Employee Retention Credit (ERC) Disallowance Notices
Tina Azarvand, Esq., LL.M. & Candice Miller, Esq.
The IRS issues three main types of Employee Retention Credit disallowance notices, each with different implications for your business. Letter 105C completely denies your ERC claim, asserting you were entirely ineligible for any credits. Letter 106C acknowledges partial eligibility but reduces your claim amount, typically due to employee count or qualified wage calculation disputes. Letter 6577C is the most urgent – it demands repayment of ERC refunds you’ve already received, with only 21 days to respond before the IRS can assess additional taxes, interest, and penalties.
Why Should You Be Concerned About Letter 105C?
If you’ve received IRS Letter 105C, the government is making a serious claim: they believe your business was completely ineligible for the Employee Retention Credit (ERC) during the periods you claimed. This isn’t just a minor adjustment – it’s a full denial of your ERC refund request that could cost your business hundreds of thousands or even millions of dollars.
The ERC was created under the CARES Act and expanded by subsequent legislation to help businesses retain employees during the COVID-19 pandemic. However, the IRS has dramatically increased its scrutiny of ERC claims throughout 2024 and into 2025, issuing thousands of complete disallowance notices to businesses that previously thought their claims were legitimate.
Letter 105C represents the most severe form of IRS challenge to your ERC claim. Unlike partial disallowances that acknowledge some eligibility, this notice means the IRS believes you were entitled to nothing. Without proper response, you’ll lose your entire ERC refund and potentially face additional consequences that could impact your business for years to come.
The stakes couldn’t be higher. Many businesses used their ERC refunds for critical operations, payroll, rent, or growth investments. Having to repay these amounts while also facing potential penalties and interest can create a financial crisis that threatens your business’s survival.
Why Is the IRS Issuing So Many 105C Letters?
The IRS’s aggressive stance on ERC claims stems from their belief that many businesses incorrectly claimed eligibility during the pandemic. The agency has identified several common areas where they believe taxpayers made errors, leading to widespread challenges of previously accepted claims. These disputes can include, but are not limited to:
Government Order Disputes
Many businesses claimed ERC eligibility based on COVID-19 government restrictions that affected their operations. The IRS now argues that general public health guidelines or recommendations don’t constitute the type of “government orders” required by law. They’re making technical distinctions between mandatory orders that legally required business changes versus advisory guidance that merely suggested certain practices. Under Treasury Regulation Section 31.3134-1(b)(1), the government order must have been issued by an appropriate governmental authority and must have limited commerce, travel, or group meetings in a way that directly affected your specific business operations. The IRS is scrutinizing whether the orders you relied upon actually imposed legally binding restrictions on your business rather than general recommendations that affected the broader economy.
Gross Receipts Calculation Challenges
If you claimed ERC eligibility based on declining revenue, the IRS is challenging how you calculated those declines. They’re arguing that many businesses made errors in comparing quarterly revenue figures or failed to account for all revenue sources properly. The Treasury Regulations under Section 31.3134-1(b)(2) establish very specific methods for calculating gross receipts declines, including rules about which quarters to compare and how to account for different types of revenue. The IRS frequently finds that businesses deviated from these prescribed methods or made computational errors that invalidate their eligibility claims.
Documentation Problems
Even when businesses may have been eligible, the IRS is denying claims due to inadequate record-keeping. They expect comprehensive documentation proving every aspect of your ERC calculation, and many businesses discovered too late that their records weren’t sufficient to satisfy IRS examination standards.
What Does Letter 105C Actually Say?
Your 105C letter contains several critical components that you need to understand immediately. The letter identifies your business, the specific tax periods being challenged, and the exact amount of ERC refunds being denied. Most importantly, it explains the IRS’s reasoning for concluding that you were completely ineligible.
The letter typically references specific legal authorities that the IRS believes support their position, such as particular sections of the Internal Revenue Code, Treasury Regulations, or administrative guidance. Understanding these references is crucial because your response must address each legal point the IRS has raised.
Your letter also includes information about your rights and response options, including deadlines for submitting additional information or filing formal protests. These deadlines are typically 30 days from the letter date, though the IRS has shown some flexibility in accepting late responses when there’s reasonable cause for the delay.
The letter includes warnings about what happens if you don’t respond appropriately. If you take no action, the disallowance becomes final, you won’t receive any ERC refund, and the IRS may consider this as acknowledgment that you agree with their position. This could potentially affect other ERC claims you’ve made for different quarters.
Your Three Critical Response Options
Option 1: Do Nothing: You can choose not to respond to the letter. This means accepting the IRS’s complete denial of your ERC claim and forfeiting any right to challenge their decision. While this requires no immediate cost or effort, it means losing potentially substantial refunds that could be worth hundreds of thousands of dollars to your business.
Option 2: File a Formal Protest: This is the most common and often most effective response. You have 30 days to submit a detailed written protest that challenges the IRS’s conclusions with comprehensive documentation and legal arguments. Your protest must address every specific objection the IRS raised and provide evidence supporting your eligibility. A successful protest requires understanding complex ERC regulations and presenting your case in a way that addresses the IRS’s specific concerns. This isn’t simply a matter of resubmitting your original documentation – you need to craft legal arguments that demonstrate why the IRS’s interpretation is incorrect and why your business legitimately qualified for the credits.
Option 3: Federal Court Litigation: Under Internal Revenue Code Section 7422, you have two years from the disallowance notice to file a refund lawsuit in federal district court or the Court of Federal Claims. This option provides the most comprehensive review but involves significant litigation costs and risks. Court litigation becomes particularly strategic when you have multiple ERC claims across different quarters. If you submitted your claims to the IRS at least six months before filing suit, you can include all related disputes in one comprehensive lawsuit, potentially resolving all your ERC issues simultaneously.
The Documentation You Need to Fight Back
Successfully challenging a 105C letter requires comprehensive documentation that proves every element of your ERC eligibility. The type of evidence you need depends on which eligibility test you’re relying on, but preparation is crucial.
For Government Order Eligibility
You need copies of all government orders, ordinances, or regulations that affected your business. These must be actual binding legal requirements, not just recommendations or guidelines. You also need documentation showing exactly how these orders impacted your operations – what you had to change, when you made changes, and how long the restrictions lasted. This often includes correspondence with government authorities, internal communications about operational changes, employee notices about modified procedures, and records of specific actions you took to comply with government requirements.
For Gross Receipts Decline Eligibility
You need comprehensive financial records that prove your revenue declined by the required percentages compared to the same quarters in 2019. These records must follow the specific calculation methods required by Treasury Regulations and account for all revenue sources. Documentation typically includes profit and loss statements, general ledger details, accounts receivable records, and detailed explanations of your accounting methods. If you have complex revenue recognition issues or multiple business entities, you’ll need additional documentation explaining how you calculated your gross receipts properly.
For Qualified Wage Calculations
You need detailed payroll records showing exactly which wages qualify for ERC purposes and which don’t. This includes employee-by-employee calculations, payroll registers, and documentation proving which employees were providing services during relevant periods and at what levels. The IRS scrutinizes these calculations carefully because the qualified wage rules are complex and many businesses made errors in determining which wages actually qualify for the credit.
Why the IRS May Be Wrong (And How to Prove It)
The IRS’s 105C letter challenges are often based on incomplete information or overly restrictive interpretations of ERC requirements. Many businesses that receive these letters actually were legitimately eligible, but the IRS’s examination process doesn’t capture the full picture of what happened during the pandemic.
The Real Cost of Losing Your ERC Claim
Beyond losing your ERC refund, a successful 105C challenge by the IRS can have devastating consequences for your business. If you’ve already received and spent ERC refunds, you may face demands for immediate repayment plus interest and penalties that can exceed the original refund amount.
Interest on ERC overpayments accumulates daily from the date you received the refund until it’s fully repaid. With interest rates rising throughout 2024 and 2025, these charges can add tens of thousands of dollars to your total liability.
Accuracy-related penalties under Internal Revenue Code Section 6662 can add another 20% to your liability if the IRS determines that your ERC claim involved substantial understatement or negligent disregard of tax requirements. In severe cases, fraud penalties of 75% may apply.
The impact on your business relationships can be equally serious. Banks and lenders may view IRS challenges to your ERC claims as indicators of tax compliance problems, potentially affecting your access to credit or the terms of future financing arrangements.
Time Is Running Out – Act Now
The 30-day response deadline in your 105C letter isn’t just a suggestion – it’s a critical deadline that can determine whether you can save your ERC claim or lose it forever. Once this deadline passes without an adequate response, your options become much more limited and expensive.
However, mounting an effective challenge to a 105C letter requires sophisticated understanding of ERC regulations, IRS examination procedures, and federal tax litigation strategies. The technical complexity of these cases makes professional representation essential for protecting your interests.
Many businesses that initially thought their cases were hopeless have successfully defended their ERC claims by working with experienced tax professionals who understand how to present their cases effectively and address the IRS’s specific concerns.
The IRS’s approach to ERC enforcement has become increasingly sophisticated throughout 2025. The agency has developed specialized examination teams, enhanced data analytics capabilities, and more aggressive interpretation of ERC requirements that make these cases more complex than ever.
Recent court decisions are beginning to provide clarity on some ERC issues while creating new uncertainties in others. Understanding how these developments affect your specific case requires staying current with rapidly evolving legal precedents and IRS positions.
The stakes are simply too high to handle a 105C letter without experienced professional help. The difference between a successful and unsuccessful response often comes down to understanding subtle legal distinctions and presenting your case in a way that addresses the IRS’s specific concerns while protecting your rights for future proceedings.
Don’t let the IRS take your legitimate ERC refunds without a fight. Our team has been helping businesses navigate CARES Act benefits, including the ERC, since the CARES Act inception. As a dedicated tax law firm with experienced tax attorneys, CPAs, and other tax professionals, we understand the complexities of ERC compliance and IRS enforcement procedures.
Contact us today at 410-698-4005 or via email at info@azarvandtaxlaw.com to discuss your Letter 105C and explore your options. You can also book a free 30-minute consultation online at AzarvandTaxLaw.com. For comprehensive resources specifically focused on ERC audit defense, visit our dedicated website at ERCAuditTaxAttorneys.com.
Time is critical when responding to IRS enforcement actions. Let our experienced team evaluate your case and develop a comprehensive response strategy that gives you the best chance of protecting your business’s interests.