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July 27, 2023
Final Regulations: Recapture of Certain Excess Employment Tax Credits under Covid-19
By: Jim Keefe

On July 24, 2023, the U.S. Treasury Department and IRS released T.D. 9978, the final regulations under sections 3111, 3131, 3132, 3134 and 3221 of the Internal Revenue Code (Code) issued under the authority granted by the Families First Coronavirus Response Act, the Coronavirus Aid, Relief, and Economic Security Act, and the American Rescue Plan Act of 2021.  These Final regulations authorize the assessment of any erroneous refund of the tax credits paid under:

Sections 7001 and 7003 of the “Families First Coronavirus Response Act

Sections 2301 of the Coronavirus Aid, Relief and Economic Security Act

Section 3131, 3132 (including any increases in those credits under section 3133), and 3134 of the Code. 

The final regulations provide that erroneous refund of COVID-19 credits are treated as underpayments of the taxes imposed under section3111(a) or 3111(b), as applicable, and so much of the taxes imposed under section 3221(a) and are attributable to the rate in effect under section 3111(a) or 3111(b) as applicable, and are, therefore, subject to assessment and administrative collection procedures.  This allows the IRS to prevent the avoidance of  the purposes of the limitations under the credit provisions and to recover the erroneous refund amounts efficiently while also preserving administrative protections afforded to taxpayers with respect to contesting their tax liabilities under the Code.  These assessment and administrative collection procedures may apply both in the processing of employment tax returns and in examining returns for excess claimed credits.  These final regulations also provide that the determination of any amounts of credit erroneously refunded must take into account any credit amounts advanced to an employer. 

In certain circumstances, third-party payors claim tax credits on behalf of their common law employer clients.  The final regulations clarify that employers against which an erroneous refund of credit may be assessed as an underpayment include persons treated as the employer under section 3401(d), 3504, and 3511, consistent with their liability for the employment taxes against which the credits applied. 

If you claimed the employee retention credit or paid family leave credit and want to know how this new regulation could impact you please contact us.  

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