The letter arrives on ordinary IRS stationery and it is only two pages long. It says the Employee Retention Credit your business claimed has been disallowed, that the refund you received in 2023 is now an erroneous refund, and that you have thirty days to respond. The refund is gone — spent on a buildout, a hiring push, or a distribution to owners — and the promoter who prepared the claim has stopped answering the phone.
We are seeing this repeatedly in 2026, and it is not a fluke. The ERC was one of the largest refundable credits in American history, and the enforcement wave behind it is unusually long-lived. If you claimed the credit through anyone other than your regular accountant, this is the year to find out where you stand.
Why 2026 Is the Year the Bill Comes Due
Three things converged. The IRS lifted its processing moratorium and began clearing a backlog of well over a million claims, so denials are moving again. The 2025 tax law extended the assessment window for ERC claims to six years from the date the credit was claimed or paid — double the ordinary employment tax statute. And the same law barred credits for the third and fourth quarters of 2021 on claims filed after January 31, 2024, invalidating a large block of late filings outright.
The practical effect of a six-year window is simple: a claim filed in 2023 can be examined until 2029. There is no quiet expiration to wait out.
The eligibility standard itself never changed: a business qualified only through a government order that fully or partially suspended operations, or a significant decline in gross receipts. “Supply chain disruption” and “we followed CDC guidance” were the theories promoters sold hardest, and the ones the IRS rejects most often.
Reading the Notice You Received
Not every letter means the same thing, and the response deadline differs sharply between them.
| Notice | What It Means | Your Move |
|---|---|---|
| Letter 105C / 106C | Claim fully or partially disallowed | Appeal within 30 days, or file suit within 2 years |
| Letter 6577C | IRS proposes to recapture a credit already paid | Respond with documentation before it becomes an assessment |
| Letter 6612 | Claim selected for examination | Produce eligibility evidence; the audit is live |
| Notice CP210 / CP220 | Account adjusted; balance now due | Verify the math, then arrange payment or dispute |
The thirty-day appeal window on a 105C is the one people miss. Missing it does not end your rights — you keep two years to bring a refund suit — but appeals is the only inexpensive door.
The Second Tax Bill Nobody Warned You About
Here is the part that surprises even sophisticated owners. Section 280C required you to reduce deductible wage expense by the amount of the ERC in the year the wages were paid, so most businesses amended their 2020 and 2021 income tax returns and paid additional income tax on top of receiving the refund.
If the credit is later disallowed, that extra income tax was paid on income you never kept. Recovering it means amending again — and the three-year refund statute on those years may already have closed. Limited relief allows an adjustment in the year of disallowance instead, but the mechanics depend on your facts and the timing of the notice.
The Full Cost of a Disallowed $400,000 Claim
- Refund to repay: $400,000, plus interest running from the date it was paid to you.
- Promoter fee already gone: commonly 15–25 percent, so $60,000 to $100,000 that no one is refunding.
- Income tax paid on the wage reduction: potentially $80,000 or more, recoverable only if the year is still open or relief applies.
- Penalties: accuracy-related penalties of 20 percent where the position lacked reasonable basis, and higher exposure where the claim was reckless.
The exposure is larger than the refund itself, which is why the whole position — credit, interest, income tax, and fees — belongs on one page before you decide whether to fight or settle.
Your Realistic Options
If You Believe the Claim Was Valid
Build the file the IRS wants: the specific government order by jurisdiction and date, the operations it suspended, quarter-by-quarter gross receipts tied to your general ledger, payroll registers supporting qualified wages, and proof you did not double-count wages used for PPP forgiveness. Many denials are documentation failures rather than eligibility failures, and a well-assembled response reverses them at appeals. If your records cannot support that reconstruction, the real problem is a bookkeeping gap worth fixing before an examiner finds it.
If the Claim Was Weak
Withdrawing an unpaid claim is far cheaper than defending a paid one. Where the refund already arrived, repayment programs and installment agreements exist, and correcting the position voluntarily generally reduces penalties compared with waiting for an assessment. The worst strategy is silence: interest compounds, penalties attach, and collection follows.
If the Money Is Simply Not There
Treat the repayment as a financing problem the moment the notice arrives. That means a real 13-week cash flow forecast, an installment agreement request rather than a missed payment, and a conversation with your lender before a tax lien surprises them. We work this alongside our CFO advisory team because the covenant consequences are often more damaging than the tax itself.
Why Medical Practices Are Overrepresented
Physician practices, dental groups, and outpatient clinics were prime promoter targets, and their facts are genuinely complicated. Many faced real state orders halting elective procedures, which can support a partial suspension — but the credit reaches only the portion of the business actually suspended, for the period the order was in force. A practice that paused elective surgery for eight weeks and claimed all of 2021 has a problem.
Gross receipts tests are messier in healthcare too, thanks to contractual allowances and payer lag. A practice that measured receipts on a cash basis in one quarter and an accrual basis in another can show a decline the ledger will not support. Our medical practice finance team reconstructs those quarters from the practice management system and the general ledger together — the comparison an examiner makes.
What to Do This Month
- Pull the actual filings. Locate every Form 941-X your business submitted, by quarter and amount. Many owners have never seen them.
- Order your IRS account transcripts. They show what was claimed, paid, and adjusted, and whether an exam is open.
- Reconstruct eligibility now, while the people who lived through it still work for you.
- Check the income tax side. Confirm whether 2020 and 2021 returns were amended for the wage reduction and whether those years remain open.
- Reserve for the exposure. If the claim looks weak, park the money somewhere liquid rather than meeting the gap under a deadline.
None of this requires panic. It requires a file. Businesses that produce clean documentation within thirty days resolve these matters for a fraction of what it costs those who start after an assessment.
The Bottom Line
The ERC is no longer a refund story. It is a compliance and cash flow story with a six-year tail: a 2023 claim stays open until 2029, the promoter carries none of the risk, and the income tax you paid on the wage reduction is a second exposure most owners never counted. The businesses that come through this well looked at their claim before the IRS did.
Received a notice, or unsure whether your claim would survive an examination? Schedule a free consultation and our tax strategy team will review your Forms 941-X, assess eligibility against the actual standard, quantify the full exposure including the payroll tax and income tax sides, and build the documentation file — with our financial reporting and payroll teams supplying the records that decide the outcome.
