Letter 106-C: Your ERC Claim Was Partially Disallowed
By Forrest Baumhover, CFP®, EA · Last verified September 1, 2026
Letter 106-C tells a business the IRS is denying part of its Employee Retention Credit claim — or all of the ERC while allowing other changes on the same return — and starts the same two-year suit clock as a full disallowance, running from this letter's own date.
If you got this letter
Got a Letter 106-C in the Mail?
Letter 106-C means the IRS reviewed an Employee Retention Credit claim and did not deny all of it the way Letter 105-C does. Instead, it disallowed part of the credit, or it disallowed the ERC entirely while still allowing other adjustments you claimed on the same return. Read the letter carefully to see which of those two situations applies to you — they call for different next steps. The IRS uses Letter 106-C (Claim Partially Disallowed) for other kinds of claims too; this page covers only an Employee Retention Credit disallowance, so if your letter concerns something else, follow the instructions in the letter.
Whichever version you have, the clock is the same: two years from the date printed on this letter to file suit over the disallowed portion in a U.S. District Court or the U.S. Court of Federal Claims, or to sign a written agreement extending that deadline. The IRS states the consequence of missing it without softening it — you can lose the right to a refund even if the IRS's own Independent Office of Appeals already decided in your favor, because a favorable Appeals decision does not stop the suit deadline on its own.
The part of your claim the IRS did allow is not in question here — this letter is only about the disallowed piece. If you are close to the two-year date and still disputing the disallowed part, see CP320B for the option to extend the deadline in writing before it runs out.
What the notice actually says
Letter 106-C is the IRS's partial claim disallowance letter; on an ERC claim, the IRS says you may receive it "because we either: Disallowed part of your ERC. Disallowed all of your ERC but allowed something else on your return." Either way, the IRS is denying some part of what you claimed on the return, and allowing the rest.
The deadline language on the IRS page If you receive Letter 106-C mirrors Letter 105-C exactly: "Generally, you have two years from the date of Letter 106-C (your original claim disallowance) to file suit." The page also mentions a 30-day informal-dispute window — "send your dispute within 30 days to help protect the two-year timeline" — but as with 105-C, the two-year date is the one that actually ends your rights.
What actually triggered it
The IRS says a partial ERC disallowance means the amount claimed for that tax period exceeds the per-employee credit limits ($5,000 per employee for 2020; $7,000 per employee per quarter for 2021, with an additional limit for a recovery startup business). Letter 106-C also covers the case where the IRS denies the entire ERC but accepts other, unrelated adjustments on the same return — meaning the letter is not purely bad news even when it fully denies the credit.
Because the letter can represent either of two different outcomes, the actual dollar breakdown matters more here than on a full disallowance. Two businesses holding a Letter 106-C can be in very different positions — one still receiving most of what it claimed, the other receiving none of the ERC but keeping unrelated adjustments — and the letter itself is the only place that breakdown is spelled out.
What Letter 106-C does not cover
It does not touch the part of your claim the IRS allowed — that portion proceeds normally, unaffected by anything in this letter or its deadlines. And, like Letter 105-C, it does not extend its own suit deadline: the two-year period runs on its own regardless of whether an appeal is still pending. The IRS states this directly — "if you don't file suit within the two-year period or sign an agreement with us extending the two-year period to file suit, you may lose your ability to receive a refund, even if Appeals has already made a favorable decision."
It also does not automatically trigger CP320B. CP320B only goes out to taxpayers already disputing a 105-C or 106-C denial with less than six months left on the two-year clock (the IRS page Understanding your CP320B notice) — receiving Letter 106-C does not by itself mean CP320B is coming, and a business approaching its deadline should not wait for it before requesting a Form 907 extension.
What people mistake Letter 106-C for
The most consequential confusion is treating a partial disallowance as good news because it isn't a full denial. The disallowed portion carries the identical two-year suit deadline a full disallowance does — there is no reduced urgency just because some of the claim survived.
It is also easy to conflate with a routine examination adjustment. This is not that — it is specifically an ERC claim disallowance with a statutory suit deadline attached (IRC §6532), not an ordinary audit change subject to the usual deficiency-procedure timeline. Treating it like a standard exam response, with no attention to the two-year date, is the mistake this letter's deadlines exist to prevent.
Where this rule comes from
The two-year suit period on Letter 106-C is the same IRC §6532 deadline that governs Letter 105-C, applied identically to a partial disallowance. The IRS's own page for this letter states the deadline, the informal 30-day guidance, and the Form 907 extension option in the same terms as 105-C's page, confirming the two notices share one legal framework even though they represent different outcomes.
A business holding a Letter 106-C with a disallowed balance it intends to keep disputing should track the two-year date from day one, independent of whether the IRS later sends CP320B — the notice is a courtesy flag near the deadline, not the taxpayer's only signal that the deadline exists.
Common Questions
What's the difference between Letter 105-C and Letter 106-C?
Letter 105-C is a full ERC disallowance. Letter 106-C means the IRS disallowed either part of the ERC, or all of it while still allowing other adjustments on the same return.
Does the allowed portion of my claim have a deadline too?
No — the two-year suit deadline applies only to the disallowed portion. The part of your claim the IRS allowed is not affected by this letter.
Can I lose my refund even if my appeal was going well?
Yes. The IRS states that missing the two-year deadline forfeits the refund even if Appeals already made a favorable decision — a pending or even a won appeal doesn't stop the suit-deadline clock by itself.
My deadline is close and my dispute is unresolved — what do I do?
If you have already responded to the disallowance, are waiting on the IRS, and have six months or less left, IRS News Release IR-2026-58 says to upload a signed Form 907 through the Document Upload Tool (select notice CP320B); you do not need to have received CP320B. If Appeals has your case and you know your Appeals Officer, ask that officer for the extension instead. The extension is not valid until the IRS signs it, so act well before your two-year date.