What Does Disallowance of Claim Mean?

A disallowance of a claim is a formal rejection of a request for payment, benefit, or refund. This action can be taken by various entities, such as an insurance company denying a policyholder’s claim, a bankruptcy court rejecting a creditor’s filing, or a government agency like the Internal Revenue Service (IRS) refusing a claimed deduction or credit on a tax return. It signifies that the reviewing body has determined the claim, either in whole or in part, does not meet the necessary legal, procedural, or evidentiary standards to be approved.

Common Reasons for Claim Disallowance

A common reason for claim disallowance involves procedural and documentation failures. Many claims are rejected because they were not filed by the statutory deadline, were submitted on an incorrect form, or are missing required signatures. For instance, the IRS may disallow a refund claim if it is filed more than three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. Similarly, incomplete or illegible insurance claim forms are frequently returned without payment.

Substantive issues, where the claim itself lacks a valid basis, are another frequent cause for denial. This occurs when the request falls outside the scope of what is legally or contractually permissible. An insurance claim for a flooded basement might be disallowed if the policy specifically excludes flood damage. In a tax context, the IRS will disallow expenses that are not considered “ordinary and necessary” for conducting a business, such as personal travel costs mixed with a business trip.

A significant portion of tax-related disallowances stem from specific compliance failures outlined in the tax code. For example, if a business pays a contractor more than $600 in a year but fails to issue a Form 1099-NEC, the IRS may disallow the deduction for that contractor’s payment. Likewise, claiming a tax credit, such as the Earned Income Tax Credit, without being able to provide proof of eligibility, like a child’s residency, will lead to the disallowance of that credit.

Understanding the Notice of Disallowance

When a claim is disallowed, the decision is communicated through a formal document, often titled a “Notice of Disallowance” or a similar name. This notice is the official record of the rejection and the starting point for any potential challenge. The notice will be sent via mail or a secure electronic portal to ensure a documented delivery date.

Within the notice, you should locate several key pieces of information. The document will state the exact amount of the claim being disallowed and provide a specific reason for the denial. For example, an IRS notice might specify that a deduction for charitable contributions was disallowed because the taxpayer failed to obtain a required contemporaneous written acknowledgment from the charity for a donation over $250. The notice will also be dated, which is important because the clock for any appeal period starts from this date.

The most actionable part of the notice details your rights and the next steps. This section will outline the timeframe you have to contest the decision, which is often 30, 60, or 90 days. It will also provide precise instructions on how to initiate a challenge, whether it involves filing a formal protest, requesting a conference, or submitting a petition to a specific office or court. Ignoring these instructions can result in forfeiting your right to appeal.

Process for Challenging a Disallowance

The first step in challenging a disallowance is to analyze the specific reason provided in the official notice. If the notice states a deduction was disallowed for lack of substantiation, the task is to gather the precise documents needed, such as receipts, bank statements, or mileage logs that directly support the original claim.

Once the reason for the disallowance is clear, the next phase involves compiling a comprehensive response package. This should include a letter of explanation that directly addresses the issues raised in the notice, along with copies of all supporting evidence. For example, if an insurance claim was denied because the event was deemed “not covered,” your response might include specific passages from your policy documents that support your interpretation, supplemented by photos or expert reports.

If the notice requires mailing documents to a specific post office box or uploading them through a secure online portal, you must use that method. Sending the information to a general address or through a different channel will likely result in it being ignored. After submission, you should receive an acknowledgment of receipt within a few weeks, and the notice may provide an estimated timeframe for a final decision on your appeal.