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Published:   |   Last Updated: February 8, 2024

Notice of Claim Disallowance: Don’t Make This Mistake

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The pandemic delays have highlighted yet another problem for taxpayers seeking a credit or refund from the IRS. When a taxpayer files a claim for credit or refund, the IRS may disallow the claim in whole or in part and issue a notice of claim disallowance – most commonly a Letter 105C or 106C – denying the taxpayer’s claim. Taxpayers who challenge the notice in a U. S. district court or the U.S. Court of Federal Claims must generally file suit within two years from the date the notice of claim disallowance is mailed (that date is typically on the top righthand side of the first page of the notice).

Most practitioners understand the time period by which a refund suit must be filed in the appropriate U.S. district court or the U.S. Court of Federal Claims to protect the taxpayer’s ability to receive a credit or refund. However, taxpayers and practitioners may be unaware that when the two-year period under IRC § 6532 expires, the IRS is prohibited under IRC § 6514(a)(2) from making a credit or refund unless the two-year period has been extended by agreement or the taxpayer has timely filed a suit in court during the two-year period. IRC § 6514(a) and (a)(2) state:

A refund of any portion of an internal revenue tax shall be considered erroneous and a credit of any such portion shall be considered void—. . . in the case of a claim filed within the proper time and disallowed by the Secretary, if the credit or refund was made after the expiration of the period of limitation for filing suit, unless within such period suit was begun by the taxpayer.

If you are working with the IRS or the IRS Independent Office of Appeals (“Appeals”), do not make the mistake and assume that working toward a resolution equates to the IRS’s ability to pay a refund or allow a credit once the IRC § 6532 statute has expired.

Even when disputing the notice of claim disallowance administratively results in the taxpayer and the IRS agreeing to a resolution within the two-year period, if the IRS has not issued payment or allowed a credit before the expiration of the two-year period, IRC § 6514(a)(2) prohibits the IRS from paying the refund or allowing the credit. Yes, you read that correctly. The payment must be made (or credit allowed) during the two-year window unless that window is extended by agreement (IRS Form 907, Agreement to Extend the Time to Bring Suit).

The backlog and other delays caused by the pandemic have made it challenging for the IRS to process a taxpayer’s dispute to a notice of claim disallowance within the two-year period. The delays in processing and moving a dispute through the Appeals process to finality, potentially exceeding the period under IRC § 6532, could affect thousands of taxpayers. For example, in calendar year (CY) 2021, the IRS issued 318,957 Letters 105C and 106C; in CY 2020, it issued 205,860, and in CY 2019 it issued 379,841. (The IRS sends out many other letters that disallow claims that are not included in these numbers, but the 105C and 106C make up the bulk of the notices of claim disallowance issued by the IRS.) TAS often works with taxpayers who have issues regarding the IRS’s notices of claim disallowance. In fact, in CY 2021, TAS worked with about 5,000 taxpayers who were issued notices of claim disallowance and were deciding whether to contest the disallowance.

These processing delays not only jeopardize taxpayers obtaining a credit or refund, but they also have downstream consequences for the IRS and beyond. For example, if taxpayers think their dispute will not be heard or resolved within the two-year period, they are more likely to file a refund suit to preserve the possibility their refund or credit will be allowed, generating potential unnecessary litigation and devotion of resources by both the IRS Office of Chief Counsel and the U.S. Department of Justice.

What Taxpayers and Practitioners Should Know When Disputing a Notice of Claim Disallowance

Two years may seem like enough time for taxpayers to dispute a notice of claim disallowance administratively. However, the process can and has exceeded the two-year period. This is especially alarming when considering the IRS’s current backlogs due to the impact of COVID-19. Once the notice of claim disallowance is received, a taxpayer needs to send a protest to the issuing office contesting the disallowance. This assumes the taxpayer understands the notice and the requirements, as these notices are not always clear. (See the National Taxpayer Advocate 2014 Annual Report to Congress, Refund Disallowance Notices Do Not Provide Adequate Explanations.) With the delays in processing correspondence, these protests may sit for many, many months before being addressed. Once assigned, the IRS employee assigned to the case needs to obtain the administrative file, bundle it with the taxpayer’s protest, and send it to Appeals for consideration. Unfortunately, the backlog adds more delays to this process. Once a protest is assigned to Appeals, it still needs to be assigned to an Appeals Officer and worked, which could be an additional six to 12 months. If the issue involves whether the claim was timely, and the Appeals Officer concludes that it was, the case may be transferred back to Exam for a determination on the merits of the refund claim. If the IRS and the taxpayer do not agree on the merits, the taxpayer can file another protest with Appeals to contest the merits of the underlying claim and the process starts all over. It is not surprising that this process may take over two years to be resolved, exceeding the two-year period in which a refund could have been issued (or a credit allowed).

IRS Form 907, Agreement to Extend the Time to Bring Suit

For taxpayers who have disputed the notice of claim disallowance and are running up against this two-year period of limitations, there is a way to extend the two-year period so the IRS isn’t barred from paying a refund (or allowing a credit) to which a taxpayer may be entitled. Many practitioners are not familiar with IRS Form 907, Agreement to Extend the Time to Bring Suit, which extends the two-year period for filing suit and allows additional time for the case to be worked administratively. See IRC § 6532(a)(2). Taxpayers may complete and submit Form 907 for the IRS’s consideration and signature to extend the two-year period. Multiple Forms 907 can be executed to extend the statute under IRC § 6532(a)(2), if each extension is executed by both the taxpayer and the IRS before the prior period has expired.

Taxpayers whose representatives have filed a Form 2848, Power of Attorney and Declaration of Representative, must be sure to designate that signing a Form 907 is within the scope of representation.

The IRS may agree to extend the period of limitations for filing suit on a disallowed claim when, among other things, an extension will prevent possible inequities to taxpayers. (See Internal Revenue Manual (IRM)  TAS has been working with the IRS to update its IRM to provide examples of when such an inequity might occur and has recommended including the following examples of reasons for extending the time for suing under IRC § 6532(a)(2):

  1. The IRS requires additional time to work the claim.
  2. The IRS agrees a refund (or credit) is appropriate, but the refund will not be issued (or credit allowed) before the limitations period under IRC § 6532
  3. The taxpayer has been adversely affected by a failure in process, such as the case was lost between functions, the IRS failed to consider additional information, or the IRS failed to forward the case to Appeals.
  4. TAS is working the case, but the refund will not be issued (or credit allowed) before the limitations period under IRC § 6532 expires.

Although Form 907 provides taxpayers relief from the two-year time period limitation, it comes with its own set of challenges. For instance, Form 907 must be executed by both the IRS and the taxpayer before the expiration of the two-year period. If a taxpayer is working with a representative, an IRS agent, or an Appeals Officer, he or she may know about the Form 907 option and how to get it signed by the IRS. But this is not the case for hundreds of thousands of taxpayers. In addition, only select individuals within the IRS and Appeals have the delegated authority to execute Form 907 on behalf of the IRS; no one in TAS has the authority to execute Form 907. So if a taxpayer is working with TAS, TAS will need time to get a Form 907 countersigned by the IRS.

If a taxpayer has submitted a protest and is still waiting for an Appeals Officer to be assigned, what should the taxpayer do if the end of the two-year period is fast approaching? 

Form 907 does not include any instructions as to where to submit the form when an IRS agent or Appeals Officer is not assigned. TAS has been working with the IRS on procedures to educate employees on the importance of using Form 907 to prevent inequities and the processing requirements. TAS has also recommended establishing a mail stop address or fax number for these taxpayers to submit their Forms 907. Our concern is for taxpayers who mail a Form 907 to the address noted on the notice of claim disallowance to request an extension of the two-year period; these taxpayers could potentially fall victim to the backlog if they cannot get their Form 907 processed and signed by the IRS within the two-year limitation. This has the potential to deny thousands of taxpayers’ refunds or credits to which they would otherwise be entitled.

If a taxpayer has not received the refund (or credit) and does not have an executed and IRS countersigned Form 907 before the expiration of the two-year period, the only recourse to receive a refund (or credit) will be to file a tax refund suit in the appropriate U.S. district court or the U.S. Court of Federal Claims.

Recommendation: The IRS Should be Proactive in Preventing Unintended Consequences

Taxpayers will have to rely on the IRS to consider and process their dispute to the notice of claim disallowance within the two-year period; otherwise, they must file suit to protect their rights. But pushing these disputes through the administrative pipeline within the two-year limitation is difficult under normal circumstances, and considering the current backlog, I have concerns many of these cases will not be worked timely.

The IRS should be able to preserve the ability of taxpayers to obtain refunds or credits without filing suit by exercising its authority under IRC § 7508A and postponing the two-year period for filing a refund suit in a U.S. district court or the Court of Federal Claims for up to one year for all notices of claim disallowance mailed within the last two years. The IRS has used this authority to address the effects of the pandemic on the IRS by postponing certain deadlines, including the filing deadlines for both filing seasons 2020 and 2021. See Notice 2020-23 and Notice 2021-21.

The IRS could use this authority once again to address the service center backlogs and case processing delays resulting from the pandemic. Thus, a universal postponement of the two-year period is the optimal solution for addressing this problem. Even if a universal postponement is utilized, the IRS also needs to continue educating taxpayers, Appeals Officers, Revenue Agents and Tax Examiners on the benefits and consequences of executing a Form 907.

In working with the IRS, TAS is discussing other procedural options to protect taxpayer rights including recommending that the IRS improve the Form 907 process by establishing a dedicated address or fax line where taxpayers can submit these forms and feel confident their requests will be considered timely. In the long-term, the IRS should explore allowing these forms to be uploaded through a portal on IRS.gov.


When the two-year clock is ticking, taxpayers or their representatives should request an extension of the time for filing suit to provide additional time to administratively resolve the matter to either receive a credit or refund or file suit. We recommend taxpayers request an extension four to six months before the two-year statute expires.

If a taxpayer has not received the refund or credit and does not have an executed, countersigned Form 907 before the expiration of the two-year period, the only recourse to receive a refund or credit will be to file a refund suit in a U.S. district court or the U.S. Court of Federal Claims.

Taxpayers should not be penalized for the delays caused by the pandemic or lack of adequate IRS staffing to timely address taxpayer responses to the disallowance of the refund claim. I look forward to continuing working on this issue with the IRS and Appeals to protect taxpayer rights and minimize the administrative burdens and hazards associated with a claim disallowance.

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The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

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