The Employee Retention Credit (ERC) saga continues, but for taxpayers with disallowed claims, there is now a more finite timeline to consider. 

The IRS has issued new guidance addressing what happens when taxpayers challenge an ERC disallowance but are approaching the deadline to file a refund suit in court. For businesses—and the lenders funding them—the guidance highlights an important reality: an anticipated ERC refund may not be available indefinitely as a solution to a federal tax liability. 

The Two-Year Clock

Taxpayers challenging an ERC disallowance generally have two years from the date of the IRS Letter 105-C or 106-C to resolve their claim administratively or file a refund suit if they disagree with the IRS’s decision. Letter 105-C applies to fully disallowed claims, while Letter 106-C addresses partially disallowed claims. 

Importantly, that two-year period does not stop simply because a taxpayer has challenged the IRS’s decision. An administrative protest or a request for consideration by the IRS Independent Office of Appeals does not suspend the deadline. 

That creates a timing issue for taxpayers whose responses remain under IRS consideration. A taxpayer may still be waiting for the IRS to act while the deadline to pursue a refund continues to approach. After the two-year period ends, the IRS cannot issue a refund, even if it later decides in the taxpayer’s favor after reviewing the disallowance.  

In April 2026, the IRS announced a streamlined process for certain taxpayers to request additional time using Form 907, Agreement to Extend the Time to Bring Suit. Under the new process, a taxpayer must have timely responded to an ERC disallowance and still be awaiting IRS consideration of that response. The taxpayer must also have six months or less remaining on the two-year period. 

Eligible taxpayers can submit Form 907 through the IRS Document Upload Tool by selecting CP320B, even if they have not received a CP320B notice. Cases already assigned to an Appeals Officer should instead be handled directly with that officer. If a representative signs Form 907, appropriate authorization, such as Form 2848, is required. 

There is one critical requirement: the IRS must countersign Form 907 before the original two-year period expires. Simply submitting the form does not extend the deadline. The IRS’s CP320B guidance also states that the agreed-upon Form 907 expiration date may be up to two years from the earliest expiration date. 

The National Taxpayer Advocate also emphasized the point that taxpayers should independently calendar the deadline and submit the form early enough to obtain the IRS countersignature.  

What This Means for Taxpayers and Lenders

For taxpayers relying on an ERC refund to resolve federal tax liabilities, a disallowance can eliminate that source of liquidity. If the two-year deadline expires, the ERC will no longer be available as a solution. 

For lenders, that creates a potential funding issue. A borrower that expected an ERC refund to address its IRS liability may instead need to pursue an alternative resolution strategy, which could affect the borrower’s liquidity and the lender’s exposure. 

Proactive Resolution Can Protect the Funding Relationship

A pending ERC dispute does not necessarily mean a taxpayer has to wait to address the underlying tax liability. Taxpayers can proactively pursue an installment agreement while an ERC disallowance remains under review. Entering an installment agreement does not mean the taxpayer is conceding that the IRS was correct to disallow the ERC. Instead, the installment agreement provides protection from levy while the ERC claim is pending.  

For lenders, that distinction can be important. Establishing a resolution strategy before a federal tax lien is filed can provide additional options if the IRS ultimately takes collection action. The installment agreement is an important prerequisite for pursuing a subordination of federal tax lien. If a lien is filed and there is no installment agreement, the lender may lose priority position before an installment agreement and subordination are negotiated, jeopardizing the funding relationship.   

The takeaway for both taxpayers and lenders is simple: do not let a pending ERC dispute become a reason to wait. While the taxpayer continues to pursue the ERC, proactively addressing the underlying tax liability can provide greater certainty, preserve resolution options, and help protect the business and its lender.