The IRS has issued temporary and proposed regs that authorize the assessment of any erroneous refund of employment tax credits authorized by the American Rescue Plan Act of 2021 (ARP; PL 117-2).
Credits for qualified sick and family leave wages.
The Families First Coronavirus Response Act (FFCRA; PL 116-127) generally required employers with fewer than 500 employees to provide paid leave to employees who are unable to work because of COVID-19. The FFCRA contained two separate provisions: the Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family and Medical Leave Expansion Act (EFMLEA). The obligation for employers to provide paid leave under the EPSLA and the EFMLEA applied to qualified leave wages paid for leave taken by employees April 1, 2020 through December 31, 2020.
The FFCRA was amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act; PL 116-260). The Relief Act extended the tax credits available for paid sick and family leave that would have satisfied the requirements of the EPSLA or EFMLEA for qualified leave wages paid with respect to leave taken by employees through March 31, 2021.
The American Rescue Plan Act of 2021 (ARP; PL 117-2) amended and extended the tax credits available to employers providing paid sick and family leave consistent with the leave provided under the FFCRA. Under ARP, refundable tax credits are available to employers that provide sick and family leave wages, which otherwise would have satisfied the requirements of the EPSLA and EFMLEA, paid with respect to leave taken by employees April 1, 2021 through September 30, 2021.
Additionally, under §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) and is sometimes referred to as the employee retention credit.
Code Sec. 6201, in general, authorizes the IRS to determine and assess tax liabilities, including interest, additional amounts, additions to 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.
Prior regs allowed for recapture of erroneous refunds.
On July 29, 2020, temporary and proposed regs (TD 9904; Prop Reg REG-111879-20) amending the Employment Tax Regulations under Code Sec. 3111 and Code Sec. 3221 to provide for the recapture of erroneous refunds of the paid sick and family leave credits under the FFCRA and erroneous refunds of the employee retention credit under the CARES Act, pursuant to the authority granted under these acts to prescribe those regulations. See IRS issues temp regs on erroneous refund of COVID-19 credits (07/28/2020).
New temporary regs also allow for recapture of erroneous refunds.
Because the ARP did not amend the FFCRA or CARES Act to extend the paid leave credits and employee retention credit provided thereunder, but rather enacted new Code sections that provide for similar credits, the temporary regulations in TD 9904 do not apply to the credits under the ARP. Therefore, separate regs are required to provide for the recapture of the erroneous refund of these credits pursuant to the authority granted under Code Sec. 3131, Code Sec. 3132, and Code Sec. 3134.
The new temporary regs provide that erroneous refunds of these credits are treated as underpayments of the taxes imposed under Code Sec. 3111(b) and so much of the taxes imposed under Code Sec. 3221(a) as are attributable to the rate in effect under Code Sec. 3111(b).
These temporary regs authorize the IRS to assess any credits erroneously credited, paid, or refunded in excess of the amount allowed as if those amounts were taxes imposed under Code Sec. 3111(b) and so much of the taxes imposed under Code Sec. 3221(a) as are attributable to the rate in effect under Code Sec. 3111(b), as applicable, subject to assessment and administrative collection procedures.
The temporary regs serve as the test for the proposed regs.
The temporary regs apply to all credits under Code Sec. 3131 and Code Sec. 3132, including any increases to the credits under Code Sec. 3133, credited or refunded on or after April 1, 2021, including advance refunds, as well as all credits under Code Sec. 3134 that are credited or refunded on or after July 1, 2021, including advance refunds. These applicability dates correspond to the effective dates of the statutory sections that provide for these credits and that authorize guidance to allow for the administrative recapture of erroneous refunds of these credits.
To continue your research on the credit for qualified sick leave wages paid during the COVID-19 pandemic, see FTC 2d/FIN ¶ H-4687.3. For the credit for qualified family leave wages paid during the COVID-19 pandemic, see FTC 2d/FIN ¶ H-4687.4. For employee retention credits, see FTC2d/FIN ¶L-17890, et seq.
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