The IRS has issued temporary regs for reconciling advance payments of refundable employment tax credits provided under the Families First Coronavirus Response Act (“Families First Act,” PL 116-127) and the Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act, PL 116-136), and recapturing the benefit of the credits when necessary.
TD 9904 ; Reg §31.3111-6T, Reg §31.3221-5T, IR 2020-169 (July 27, 2020)
The text of the temporary regs also serves as the text of proposed regs ( Preamble to Prop Reg REG-111879-20 ) issued concurrently with the temporary regs.
Background-credits related to COVID-19 relief. Employers paying qualified sick leave wages and qualified family leave wages required by the Families First Act (collectively, Qualified Leave Wages), as well as qualified health plan expenses allocable to Qualified Leave Wages (Qualified Health Plan Expenses) are eligible for refundable tax credits under the Families First Act.
Specifically, Sec. 7001 and Sec. 7003 of the Families First Act provide a refundable tax credit against an employer’s share of the social security taxes (imposed under Code Sec. 3111(a) ) and an employer’s share of the social security and Medicare taxes imposed on railroad employers (under Code Sec. 3221(a) ) for each calendar quarter, in an amount equal to 100% of Qualified Leave Wages paid by the employer plus Qualified Health Plan Expenses with respect to that calendar quarter.
Additionally, under Sec. 2301 of the CARES Act, certain employers experiencing a full or partial business suspension due to COVID-19 shut-down orders from a governmental authority, or experiencing a statutorily specified decline in business, are also allowed a refundable tax credit under the CARES Act of up to 50% of the qualified wages, including allocable qualified health expenses; this credit is limited to $10,000 per employee over all calendar quarters combined (Qualified Retention Wages). This credit is sometimes referred to as the employee retention credit.
An employer paying Qualified Leave Wages or Qualified Retention Wages may seek an advance payment of the related tax credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. See IRS issues draft form for advance payment of employer credits due to COVID-19 (04/01/2020).
Background-assessment authority. Code Sec. 6201 , in general, authorizes the IRS to determine and assess tax liabilities including interest, additional amounts, additions to the tax, and assessable penalties. However, the general authority to assess tax liabilities under Code Sec. 6201(a) does not allow the assessment of any non-rebate portion of an erroneous refund of a refundable credit.
“Non-rebate” refers to the portion of any refund of a credit that exceeds the IRS’s determination of the recipient’s tax liability (i.e., the remaining portion of the refund that is paid to the recipient after the refund has been applied to the recipient’s tax liability). ( Preamble to TD 9904 )
Instead, non-rebate refunds are generally recovered or recaptured through voluntary payment or litigation. ( Preamble to TD 9904 )
Sections 7001(f) and 7003(f) of the Families First Act and section 2301(l) of the CARES Act authorize the IRS to issue guidance allowing the administrative reconciliation and recapture of erroneous refunds. Sections 7001(f) and 7003(f) of the Families First Act provide, in relevant part, that the IRS must provide such regulations or other guidance as may be necessary to carry out the purposes of the credit, including regulations or other guidance: (1) to prevent the avoidance of the limitations under this provision; (2) to minimize compliance and record-keeping burdens associated with the credit; (3) to provide for a waiver of penalties for failure to deposit amounts in anticipation of the allowance of the credit; (4) to recapture the benefit of the credit in cases where there is a subsequent adjustment to the credit; and (5) to ensure that the wages taken into account for the credit conform with the paid sick leave and paid family leave required to be provided under the Families First Act.
Similarly, section 2301(l) of the CARES Act provides in relevant part that the IRS shall issue such forms, instructions, regulations, and guidance as are necessary to provide for the reconciliation of an advance payment of the employee retention credit with the amount advanced at the time of filing the return of tax for the applicable calendar quarter or tax year, and to provide for the recapture of the credit under section 2301 of the CARES Act if such credit is allowed to a taxpayer that receives a small business loan under section 1102 of the CARES Act during a subsequent quarter.
Temp regs. The temporary regs provide that any amount of the credits for qualified leave wages under sections 7001 and 7003 of the Families First Act, plus any amount of credits for qualified health plan expenses under sections 7001 and 7003, including any increases in these credits under section 7005, and any amount of the employee retention credit for qualified wages under section 2301 of the CARES Act that are erroneously refunded or credited to an employer shall be treated as underpayments of the taxes imposed by Code Sec. 3111(a) or Code Sec. 3221(a) , as applicable, by the employer and may be administratively assessed and collected in the same manner as the taxes. (Reg §31.3111-6T(a); Reg §31.3111-6T(b); Reg §31.3221-5T(a); Reg §31.3221-5T(b))
The temporary regs provide that the determination of any amount of credits erroneously refunded must take into account any credit amounts advanced to an employer under the process established by the IRS in accordance with sections 7001(b)(4)(A)(ii) and 7003(b)(3)(B) of the Families First Act and section 2301(l)(1) of the CARES Act. (Reg §31.3111-6T(c); Reg §31.3221-5T(c))
In certain situations third party payors claim credits on behalf of their common law employer clients. ( Preamble to TD 9904 ). Therefore, the temporary regs also provide that employers against whom an erroneous refund of credits can be assessed as an underpayment include persons treated as the employer under Code Sec. 3401(d) (defining “employer”), Code Sec. 3504 (acts performed by agents), and Code Sec. 3511 (certified professional service organizations), consistent with their liability for the Code Sec. 3111(a) and Code Sec. 3221(a) taxes against which the credit applied. (Reg §31.3111-6T(d); Reg §31.3221-5T(d))
Applicable date. The temporary regs apply to all credit refunds under section 7001 and 7003 of the Families First Act advanced or paid on or after April 1, 2020 and all credit refunds under section 2301 of the CARES Act advanced or paid on or after March 13, 2020. ( Reg §31.3111-6T(e); Reg §31.3221-5T(e))
Continue your research on Checkpoint: For the credit for qualified sick leave wages paid during the COVID-19 pandemic, see FTC 2d/FIN ¶ H-4687.3 ; United States Tax Reporter ¶31,114 . For the credit for qualified family leave wages paid during the COVID-19 pandemic, see FTC 2d/FIN ¶ H-4687.4 ; United States Tax Reporter ¶31,114 . For employee retention credits, see FTC2d/FIN ¶L-17890 et seq.