What to Do After Receiving a Notice of Disallowance
When the IRS disallows your refund claim, the notice you receive is a critical legal document. Understand its meaning and the strategic choices you must now make.
A Notice of Disallowance is a formal letter from the Internal Revenue Service that rejects a taxpayer’s claim for a refund or credit. This communication, issued as Letter 105C for a full disallowance or Letter 106C for a partial one, follows the submission of an amended return, such as a Form 1040-X, or another refund request like Form 843. The notice informs the individual or business of the IRS’s decision and states the reasons for the denial. This document serves as the legal trigger, starting the clock on specific deadlines for any challenges the taxpayer may wish to pursue.
Decoding Your Notice of Disallowance
Upon receiving a Notice of Disallowance, review the document to understand the basis of the IRS’s decision. The date printed on the notice is significant, as it establishes the beginning of the period to take further action. The notice will also identify the specific tax year or reporting period in question and the items that have been disallowed, such as particular deductions, expenses, or tax credits.
The document provides an explanation from the IRS detailing why the claim was rejected. This could range from a determination that the claim was not filed on time to a conclusion that the taxpayer did not meet the eligibility requirements for a specific tax benefit. The notice will also show the resulting financial impact, which could be a smaller refund than expected, no refund at all, or even a balance due. The letter should outline your formal appeal rights.
Available Courses of Action
After interpreting the notice, a taxpayer has a few distinct paths. The first option is to agree with the IRS determination. This requires no further action unless the disallowance results in a new tax liability, which must then be paid. Taking no action means the refund claim is abandoned.
A second option is to dispute the decision administratively by requesting a conference with the agency’s Independent Office of Appeals. This involves submitting a formal written protest to the IRS office that issued the disallowance. This path keeps the disagreement out of the court system and seeks a resolution directly with the IRS.
The third course of action is to initiate a lawsuit against the government by filing a refund suit in a U.S. District Court or the U.S. Court of Federal Claims. The U.S. Tax Court is not an available venue for these cases, as its jurisdiction is limited to disputes over a Notice of Deficiency, which is issued before a contested tax is paid. A Notice of Disallowance relates to a refund of tax already paid, placing jurisdiction with the district courts or Court of Federal Claims.
Requesting an IRS Appeals Conference
An Appeals conference is not a court proceeding but an informal meeting designed to resolve tax controversies without litigation. To begin this process, the taxpayer must submit a formal written protest to the IRS address provided in the disallowance letter. The notice will specify a 30-day window to file this protest.
The requirements for the protest depend on the amount of the claim. For disallowed claims totaling $25,000 or less for any tax period, a less formal “small case request” can be made. This requires a brief written statement outlining the disagreement. For amounts over $25,000, a formal written protest is necessary.
A formal protest must provide a detailed explanation of the dispute and include the following:
- A statement requesting an Appeals conference
- A copy of the disallowance letter
- Your contact information
- A list of each disallowed item
- The reasons you disagree with the IRS’s findings
- A statement of facts that supports your position
- Any law or other legal authority you are relying on
The entire protest must be signed under a penalties of perjury statement. After submission, the case is assigned to an Appeals Officer who will review the protest and schedule a conference.
Pursuing a Refund Suit in Federal Court
If you choose to bypass the IRS Appeals process or are unsuccessful there, the next step is to file a refund suit in federal court. The tax in question must have been fully paid before the initial refund claim was filed.
The deadline for filing a refund suit is two years from the date printed on the Notice of Disallowance. This two-year statute of limitations is not paused or extended if you decide to first go to IRS Appeals. If the Appeals process is lengthy and the two-year deadline is approaching, you must file the suit to protect your right to sue. Failure to file within this window permanently forfeits your right to a refund.
To preserve your rights while in Appeals, you can file a Form 907, Agreement to Extend the Time to Bring Suit. This form, if signed by both you and an authorized IRS official before the two-year deadline expires, extends the time limit for filing a lawsuit. If an agreement cannot be secured, you must file the suit by initiating a formal “complaint” to prevent the statute of limitations from expiring.