Status 12 Is Not a Developed Record: How ERC Letter 105-C Cases Reach PAM Thin
- Heath Vo, JD, CPA
- 1 hour ago
- 10 min read
Some Employee Retention Credit cases arrive in Appeals wearing all the administrative clothing of an IRS examination.
There is an AIMS control. The case reached Status 12. An Audit Accounting Aide or another Compliance employee touched it. A checksheet was completed. A Letter 105-C was issued. The taxpayer protested. The file was routed to Appeals.
What may be missing is the examination.
No focused Information Document Request. No review of the employer’s books and records. No developed workpapers tying the governmental order, business effect, qualified wages, PPP allocation, gross receipts, or aggregation analysis to the quarters at issue.
Just a thin file carrying a very official status code.
A status code can move a case. It cannot create facts.
That distinction matters throughout Appeals. It becomes critical when the case is being considered for Post-Appeals Mediation, because PAM is designed to mediate a developed dispute—not perform the examination that should have occurred before the claim was disallowed.
First, be precise about when an examination begins
There is no single universal rule stating that an IRS examination legally begins only after the IRS issues an IDR and reviews the response. The IRS authorities describe several related events, and practitioners should not collapse them into one.
For inventory purposes, Status 10 means “Assigned, Not Started (No Time Applied).” Status 12 means “Assigned, Started (Time Applied).” Those labels appear in the IRS’s own procedural guidance. The Internal Revenue Manual also identifies Status 12 through 18 as cases currently under examination.
A related return can also be routed because the key case has been opened. That linkage may be entirely appropriate for inventory control and coordination. It still does not establish that anyone requested or reviewed the related taxpayer’s books and records.
But the coding and the work can diverge. The IRS maintains an actual report titled “Status 12 with No Time Applied.” According to IRM 4.7.6.5.8, the report identifies cases where AIMS shows the examination has started but time is not being applied on ERCS.
The IRS created a report for the precise situation in which the status and the work do not match. Of course it did.
More importantly, the IRM’s description of substantive examination work goes further than a status update. IRM 4.70.13 states that an examination involves time applied to inspecting books and records to determine the correctness of a return. Its execution-phase guidance describes issue development as determining facts, applying law, using the IDR process to obtain relevant documents, reviewing IDR responses, analyzing books and records, and documenting the resulting workpapers.
IRM 4.10.7.6.1.3.1 adds another marker: examination activity documentation begins when the taxpayer receives written notice that an examination is commencing.
The National Taxpayer Advocate obtained an even more direct statement from the IRS. In responding to a recommendation that the IRS proactively request substantiation before issuing certain ERC disallowances, the IRS stated that requesting books and records to support a claim “may constitute an audit/examination.” The IRS therefore said it was not appropriate to request those records unless it intended to audit the claim.
Put together, the authorities support a careful distinction:
Status 10 shows assigned but not started inventory.
Status 12 shows that the case has been opened as started for AIMS purposes.
Written notice tells the taxpayer an examination is commencing.
Focused information requests, review of the responses, analysis of books and records, and documented conclusions develop the merits.
Status 12 is evidence of administrative opening. It is not proof of a developed examination record.
The Letter 105-C pipeline can reverse the ordinary sequence
The ordinary sequence is easy to understand. The IRS opens an examination, tells the taxpayer the return or claim is being examined, requests the information necessary to test the issues, reviews the response, develops workpapers, reaches conclusions, and then issues the appropriate report or claim-disallowance correspondence.
The ERC Letter 105-C pipeline has not always worked that way.
The National Taxpayer Advocate reported that the IRS issued approximately 28,000 ERC disallowance notices in the summer of 2024, many based on risk-filter results rather than a prior examination. Taxpayers protested those disallowances expecting Appeals review. Instead, many responses were routed to Compliance for an initial review because no examination had previously occurred.
That point deserves to be read twice: the claims had already been disallowed, but the taxpayer’s protest was sent to Compliance because the examination had not happened yet.
The Taxpayer Advocate explained that this type of document review would ordinarily occur during an examination, before the notice of claim disallowance and before the two-year refund-suit clock begins.
Current IRM procedures show the mechanics. Under IRM 21.7.2.7.11, a response to an ERC Letter 105-C or 106-C is treated as a new case. Depending on the prior disallowance and the taxpayer’s response, Accounts Management links the earlier file and forwards the matter to CAT-A using HQ Reserved 9. The listed package may consist of the original claim, the Letter 105-C or 106-C, the protest, any additional documents the taxpayer voluntarily provided, and linked return images.
CAT-A leaves a case note. A matter meeting Appeals criteria may then be routed directly from Compliance to Appeals.
That is a routing process. It is not necessarily a conventional examination with a focused IDR, issue-by-issue document review, taxpayer contact, developed workpapers, and an examiner’s analysis of the relevant records.
Letter 105-C itself is a statutory claim-disallowance notice. It tells the taxpayer that the claim has been denied and provides the route to challenge that denial through Appeals or a refund suit. A taxpayer may include supporting documents with the protest, but the letter is not the equivalent of a focused Form 4564 asking for the records needed to examine each ERC eligibility and computation issue.
The IRS’s classification guidance reinforces the boundary. IRM 4.19.11.4.2 permits a classifier to accept, disallow, reject without consideration, or select a claim for examination. When information is missing at classification, the IRM expressly warns employees not to request books and records before examination. Only forms, schedules, worksheets required by the form instructions, or an explanation of the claim may be requested at that stage.
If a claim is actually selected, Exam establishes AIMS controls and proceeds with auditing or processing it. Classification and examination are related. They are not synonyms.
An Audit Accounting Aide and a checksheet do not answer the question
The title of the employee does not decide whether a quality examination occurred.
The IRM expressly allows trained tax examiners and Audit Accounting Aides to conduct appropriate correspondence examinations. It also requires them to issue the proper initial contact letter and follow the same procedures used by tax compliance officers and revenue agents to ensure a quality audit.
Classification checksheets are part of that system. But the IRM also requires every correspondence examination to contain workpapers documenting and supporting the process and result. It states that the depth, scope, and quality of the examination should not be compromised merely because the work occurred by correspondence.
That is the useful test.
Was there an initial contact letter advising the taxpayer that the return or claim was being examined? Was there a focused IDR? What records were requested? What did the taxpayer provide? Who reviewed the records? What audit steps and tests were performed? Which facts were accepted or rejected? Where are the workpapers supporting the conclusion?
If the answers are missing, the fact that an Audit Accounting Aide followed a checksheet and charged time does not make the evidentiary record thicker out of professional courtesy.
Checking a box is efficient. Developing a record is work.
The IRS itself distinguishes a started case from a reviewed case
The distinction between “started” and “examined” is not merely semantic.
IRM 4.2.1 provides a concrete example in its case-closing guidance. It separately identifies cases that are not started, cases that are started but whose books and records have not been reviewed, and cases in which books and records have been reviewed. A started case with no books-and-records review may still be surveyed under the applicable procedures.
The same IRM later states that no audit occurs when a return is selected for examination but closed by survey; a later audit would not be treated as a reopening.
This does not mean every thin ERC file must be surveyed. It does not mean Status 12 is meaningless. And it does not automatically invalidate a Letter 105-C.
It does mean the IRS’s own procedures recognize that a return can be selected, assigned, and even started without an inspection of books and records sufficient to constitute a completed audit.
The label and the substance remain different questions.
Appeals is told the merits were considered
Here is where the procedural mismatch becomes consequential.
IRM 8.20.5 tells Appeals Processing that ERC Letter 105-C and 106-C claim cases should arrive from Compliance after the merits have been considered. Current guidance directs Appeals to reject many claim cases that arrive directly from Accounts Management instead of Compliance.
That routing rule creates an administrative presumption: Compliance touched the file, therefore the merits were considered.
But “merits considered” can describe very different records. One file may contain focused IDRs, detailed responses, interviews, analyses, workpapers, and a reasoned report. Another may contain the original Form 941-X, a risk-filter outcome, a checksheet, a short case note, the Letter 105-C, and whatever the taxpayer chose to attach to the protest.
Those are not equivalent examination records.
The IRS’s response to the Taxpayer Advocate acknowledges the downstream problem. When a taxpayer provides new information after the file has reached Appeals, the case may need to go back to Compliance for consideration. That back-and-forth consumes time while the two-year period under IRC § 6532(a) continues to run.
The folder may say “Exam.” Appeals still has to decide whether the facts were examined.
Why the thin file becomes a PAM problem
Post-Appeals Mediation is available only after ordinary Appeals settlement discussions have been unsuccessful and while the case remains in Appeals jurisdiction. It is not the appropriate venue for presenting new facts or arguments. IRM 8.26.5.4 warns that new facts and arguments must be presented before the mediation session begins; an attempt to introduce them during the session can terminate the mediation.
That rule assumes the dispute has already been developed.
When an ERC case reaches Appeals through the Letter 105-C protest pipeline with a thin file, the parties may be asked to discuss litigation hazards without a shared factual record. Appeals may be working from a classification conclusion instead of an examination analysis. The taxpayer may have submitted a protest without knowing which records the IRS believed were missing. Compliance may have never identified the precise factual disagreement.
Then someone proposes PAM.
Mediation can help resolve a developed disagreement. It cannot retroactively turn a risk filter, a status code, and a protest into an examination.
This does not make PAM the wrong tool. ERC cases can be excellent PAM candidates, and we have successfully mediated numerous ERC matters. It means the record must be made mediation-ready before the session—not during it.
What practitioners should establish before requesting PAM
The first task is procedural reconstruction.
When did the case enter Status 10?
When and why did it move to Status 12?
Who applied time, and what work did that person document?
Was an initial examination contact letter issued?
Was a Form 4564 or other focused information request issued?
Which books and records did the IRS request, receive, and review?
Were the taxpayer’s documents submitted in response to an IDR or volunteered with the protest?
What workpapers support the disallowance?
Does the file explain the government’s position for each quarter and each disputed element?
The second task is factual organization. The record should connect the legal theory to the actual evidence: governmental orders, the effect on operations, gross-receipts computations, aggregation, qualified wages, health-plan expenses, PPP interactions, and any other disputed element.
The third task is to separate the procedural defect from the merits. A thin file does not make an ERC claim allowable. It means the parties should identify and develop the missing facts before attempting to mediate the hazards.
The fourth task is statute protection. Letter 105-C generally starts a two-year period to file a refund suit under IRC § 6532(a), and asking Appeals to review the disallowance does not stop that clock. Form 907 can extend the period only if the taxpayer and the IRS execute it before the deadline. A pending administrative conversation is not an extension.
The IRS can misplace a file for months and still locate the statute expiration date with remarkable precision.
Do not turn the procedural point into a magic argument
The Internal Revenue Manual is the IRS’s operating guidance; it does not create a standalone refund entitlement. A taxpayer should not assume that proving Status 12 was premature automatically voids the Letter 105-C, establishes ERC eligibility, or compels a concession.
That is not the point.
The point is that Appeals and the parties cannot responsibly evaluate litigation hazards—or conduct an effective PAM—without knowing what factual development actually occurred. A thin administrative file affects credibility, issue definition, evidentiary risk, the need for pre-mediation development, and whether the case is ready for a settlement process that bars new facts during the session.
There is no magic motion. Tax controversy would be much less employable if there were.
The bottom line
Status 10, Status 12, an Audit Accounting Aide, a checksheet, and a Letter 105-C can establish that an ERC claim moved through the IRS’s systems. They do not, standing alone, establish that the Service requested and reviewed the records necessary to examine the claim.
The strongest official support is not a single sentence declaring that every examination begins with an IDR. It is the combined framework: Status 10 is assigned and unstarted; Status 12 is administratively started; requesting books and records may constitute an examination; substantive examination work uses IDRs and reviews records to develop facts; and a started case can still be distinguished from one in which books and records were reviewed.
For ERC cases headed toward PAM, that distinction is not academic. It determines whether the parties arrive with a dispute that can be mediated or a folder that still needs to be examined.
Contact us to discuss whether your ERC case is properly developed and positioned for Post-Appeals Mediation.
We left the IRS. You’re welcome.
Comments