IRS Letter 106C: Why Your Credit Was Reduced and How to Respond

IRS Letter 106C tells you the IRS has partially disallowed the Premium Tax Credit you claimed on your return, meaning the agency has already decided you don’t qualify for the full amount and the difference will be treated as additional tax. You have two years from the date on the letter to dispute that decision, but a written response with corrected documentation inside 30 days gives you the best shot at reversing it.¹

What the Letter Actually Means

Letter 106C is titled “Claim Partially Disallowed.” The IRS compared your return to the Marketplace data on Form 1095-A, recalculated the Premium Tax Credit, and concluded you claimed more than you qualified for. The letter identifies which portion was disallowed and the reason.¹

This is a decision, not a proposal. A CP2000 invites you to agree or disagree before anything is assessed; Letter 106C reflects a determination that has already happened. The excess between the advance credit paid to your insurer and the smaller credit the IRS now says you qualify for becomes additional tax on your account.² If you believe the IRS got it wrong, or you can now provide the documentation that was missing, you can push back.

Why the IRS Reduced Your Credit

The most common trigger is a missing or incomplete Form 8962. If advance payments went to your insurer during the year but you didn’t attach Form 8962 reconciling them, the IRS has no way to verify the credit and typically disallows the unverified portion.³

Income is the second common cause. If your final household income came in higher than your Marketplace estimate, your allowable credit shrinks. For tax years beginning in 2026, income above 400% of the federal poverty level disqualifies you from the Premium Tax Credit entirely, because the temporary expansion that removed the 400% cap expired at the start of that year.⁴

Errors on Form 1095-A itself are the third. If the Marketplace reported wrong premium amounts, an incorrect second-lowest-cost silver plan benchmark, or bad coverage dates, your Form 8962 will be off even when you filled it in correctly. That kind of error has to be fixed at the Marketplace before your response will land.

The Deadlines That Matter

Two years from the date on your letter is the hard ceiling. Within that window you can dispute the disallowance with the IRS, request review by the IRS Independent Office of Appeals, or file suit in a U.S. District Court or the U.S. Court of Federal Claims. Once it closes, you lose the right to any refund or credit tied to this claim, even if Appeals later agrees with you.¹

Aim for 30 days, not two years. A prompt response keeps your file moving and reduces the chance that collection activity starts on the disputed balance. If you need longer to pull records or wait on a corrected Form 1095-A, call the phone number on the letter and ask for additional time before your initial response window runs out.

The two-year clock keeps running while the IRS reviews your dispute and while Appeals considers your case. If resolution is slow and the deadline is closing in, filing suit may be the only way to preserve your rights, even with administrative review still underway.

What to Send Back

Your response package has three pieces: a written explanation of why you disagree, a completed or corrected Form 8962, and the Form 1095-A (original or corrected) that supports the numbers on it.⁵ Sign and date the response section of the letter itself to mark that you disagree with the determination. In the written explanation, ask that your case be forwarded to the Independent Office of Appeals if the IRS does not agree with your position.

Mail everything to the address on the first page of the letter. Use certified mail with return receipt so you can prove the date the IRS took delivery. Send copies and keep originals, along with a full duplicate of the package, in your own file.

Do not pad the envelope with material the IRS didn’t ask for. Bank statements, enrollment printouts, and unrelated tax records slow processing without helping your case. Stick to what supports your Form 8962 math.

Fixing a Wrong Form 1095-A First

If the numbers on your Form 1095-A are wrong, filing a correct Form 8962 won’t solve the problem. Call the Marketplace Call Center at 1-800-318-2596 and ask for a correction. The Marketplace will investigate, issue a corrected form when warranted, and report the update to the IRS.⁶ The corrected form also appears in your HealthCare.gov account and can be pulled through your IRS online account.

Demographic errors (name, Social Security number, date of birth) don’t require a corrected 1095-A and can be handled on the tax return itself. Premium amounts, silver plan benchmarks, and advance payment figures need to be corrected at the source before your response goes in.

Recalculating on Form 8962

Form 8962 is where the reconciliation happens. Part I uses your final household income, family size, and the federal poverty guidelines to determine the share of income you’re expected to contribute toward premiums.⁷ Part II uses your actual monthly premiums, the benchmark silver plan, and the advance payments from Form 1095-A. The gap between the expected contribution and the benchmark cost is your credit; compared against the advance payments in Column C of Form 1095-A, that tells you whether excess payments have to be repaid.

Household income for this purpose is Modified Adjusted Gross Income: your AGI plus any untaxed foreign income, non-taxable Social Security benefits, and tax-exempt interest.⁸ For most filers MAGI is simply line 11 of Form 1040, but any of those add-backs that apply must be included. For 2026 returns, MAGI must fall between 100% and 400% of the federal poverty level to qualify for any Premium Tax Credit.⁹

Under the old rules a single filer between 200% and 300% of the poverty level could cap repayment at $975. Now that filer repays the whole excess. Every dollar of credit you can document on your Form 8962 response reduces your liability dollar for dollar, which is why the accuracy of your response package matters more than it did a few years ago.

If the IRS Doesn’t Change Its Position

Appeals is your next step. The IRS Independent Office of Appeals reviews the case separately from the office that issued the disallowance. You can request Appeals review at any time within the two-year window, and the request goes in your written response.¹ Requesting Appeals does not pause the two-year clock.

Beyond Appeals, you can file a refund suit in U.S. District Court or the U.S. Court of Federal Claims, provided the suit is filed within two years of the date on Letter 106C. You and the IRS can agree in writing to extend that deadline using Form 907, but the agreement has to be executed before the two years expire.¹

Tax Court is not on the menu here. Tax Court handles deficiency cases; Letter 106C is a claim disallowance. If the dispute later produces a formal Notice of Deficiency (the 90-day letter), Tax Court becomes an option at that stage with its own 90-day deadline running from that separate notice.¹²

Interest, Penalties, and Paying a Balance

Interest on the underpayment runs from the original due date of the return, not from the date on Letter 106C. The IRS charges the federal short-term rate plus three percentage points, compounded daily.¹³ For the first quarter of 2026 the individual underpayment rate is 7%, and it is adjusted quarterly.¹⁴

An accuracy-related penalty of 20% can also apply if the IRS finds the original error was due to negligence or a substantial understatement of tax. For individuals, a substantial understatement means the understatement exceeds the greater of $5,000 or 10% of the tax required to be shown on the return.¹⁵ The penalty doesn’t apply if you can show reasonable cause and good faith, and a prompt, documented response to Letter 106C supports that argument if penalties come up later.

If a balance stands after all of this, you have options:

Pay in full by direct transfer, check, or debit or credit card to stop further interest and penalties.
Set up an installment agreement online or with Form 9465. While the agreement is active, the late-payment penalty drops from 0.5% to 0.25% per month, though interest keeps accruing.¹⁶¹³
Propose an Offer in Compromise if paying the full amount would create genuine financial hardship. The IRS reviews your income, expenses, and assets before accepting.¹⁷
Request Currently Not Collectible status if paying would prevent you from covering basic living expenses. The debt and interest remain, but active collection pauses while the status is in effect.

When to Bring in the Taxpayer Advocate Service

If the IRS isn’t processing your response in reasonable time, or the resulting tax bill is causing real financial hardship, the Taxpayer Advocate Service can step in. TAS takes cases where a taxpayer is facing economic harm, an immediate threat of adverse collection action, significant costs without relief, an IRS delay of more than 30 days on an account problem, or a missed response by a date the IRS promised.¹⁸

Reach TAS at 1-877-777-4778, or file Form 911, Request for Taxpayer Advocate Service Assistance. TAS operates independently from the offices that issue Letter 106C and can often move a case that normal channels have stalled.

1
Taxpayer Advocate Service. Letter 106 C, Claim Partially Disallowed
2
Internal Revenue Service. About Form 1095-A, Health Insurance Marketplace Statement
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Internal Revenue Service. How to Correct an Electronically Filed Return Rejected for a Missing Form 8962
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Office of the Law Revision Counsel. 26 USC 36B – Refundable Credit for Coverage Under a Qualified Health Plan
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Internal Revenue Service. About Form 8962, Premium Tax Credit
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CMS Agent and Brokers FAQ. How Can I Help My Clients Make Corrections to Their Form 1095-A
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Internal Revenue Service. Instructions for Form 8962 Premium Tax Credit
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HealthCare.gov. Modified Adjusted Gross Income (MAGI)
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Internal Revenue Service. Updates to Questions and Answers About the Premium Tax Credit
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CMS Agent and Brokers FAQ. Are There Limits to How Much Excess Advance Payments of the Premium Tax Credit Consumers Must Pay Back
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Internal Revenue Service. Understanding Your CP3219N Notice
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Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges
14
Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
15
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
16
Internal Revenue Service. Payment Plans Installment Agreements
17
Internal Revenue Service. Offer in Compromise
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Internal Revenue Service. 13.1.7 Taxpayer Advocate Service (TAS) Case Criteria