Rule2021-19524
Recapture of Excess Employment Tax Credits Under the American Relief Plan Act of 2021
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 10, 2021
Effective
September 10, 2021
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document sets forth temporary regulations under sections 3131, 3132, and 3134 of the Internal Revenue Code (Code), added by sections 9641 and 9651 of the American Rescue Plan Act of 2021. These temporary regulations authorize the assessment of any erroneous refund of the tax credits paid under sections 3131, 3132 (including any increases in those credits under section 3133), and 3134 of the Code. The text of these temporary regulations also serves as the text of the proposed regulations (REG-109077-21) set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.
Full Text
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<title>Federal Register, Volume 86 Issue 173 (Friday, September 10, 2021)</title>
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[Federal Register Volume 86, Number 173 (Friday, September 10, 2021)]
[Rules and Regulations]
[Pages 50637-50643]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-19524]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[TD 9953]
RIN 1545-BQ09
Recapture of Excess Employment Tax Credits Under the American
Relief Plan Act of 2021
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: This document sets forth temporary regulations under sections
3131, 3132, and 3134 of the Internal Revenue Code (Code), added by
sections 9641 and 9651 of the American Rescue Plan Act of 2021. These
temporary regulations authorize the assessment of any erroneous refund
of the tax credits paid under sections 3131, 3132 (including any
increases in those credits under section 3133), and 3134 of the Code.
The text of these temporary regulations also serves as the text of the
proposed regulations (REG-109077-21) set forth in the notice of
proposed rulemaking on this subject in the Proposed Rules section of
this issue of the Federal Register.
DATES:
Effective date: These temporary regulations are effective on
September 10, 2021.
Applicability date: For date of applicability, see Sec. Sec.
31.3131-1T, 31.3132-1T, and 31.3134-1T of these temporary regulations.
FOR FURTHER INFORMATION CONTACT: Concerning these temporary
regulations, NaLee Park at 202-317-6798.
SUPPLEMENTARY INFORMATION:
Background
The Families First Coronavirus Response Act (Families First Act),
Public Law 116-127, 134 Stat. 178 (March 18, 2020), the Coronavirus
Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136,
134 Stat. 281 (March 27, 2020), the COVID-related Tax Relief Act of
2020 (Tax Relief Act), enacted as Subtitle B of Title II of Division N
of the Consolidated Appropriations Act, 2021, Public Law 116-260, 134
Stat.1182 (December 27, 2020), the Taxpayer Certainty and Disaster
Relief Tax Act of 2020 (Relief Act), enacted as Division EE of the
Consolidated Appropriations Act, 2021, and the American Rescue Plan Act
of 2021 (the ARP), Public Law 117-2, 135 Stat. 4 (March 11, 2021),
provide relief to taxpayers from economic hardships resulting from the
Coronavirus Disease 2019 (COVID-19). As described below, this relief
includes employment tax credits for certain wages paid by employers.
I. Paid Sick and Family Leave Credits
The Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family
and Medical Leave Expansion Act (EFMLEA), enacted as Divisions E and C
of the Families First Act, respectively, generally required employers
with fewer than 500 employees to provide paid leave due to certain
circumstances related to COVID-19. Sections 7001 and 7003 of the
Families First Act generally provided that non-governmental employers
subject to the paid leave requirements under EPSLA and EFMLEA were
entitled to fully refundable tax credits to cover the wages paid for
leave taken for those periods of time during which employees are unable
to work or telework for specified reasons related to COVID-19, plus
allocable qualified health plan expenses.
Although the requirement to provide employees with paid leave under
EPSLA and EFMLEA expired December 31, 2020, the tax credits for
qualified leave wages paid for periods of leave taken beginning on
April 1, 2020, and ending on December 31, 2020, were extended by the
Tax Relief Act through March 31, 2021, for paid leave that would have
satisfied the requirements of EPSLA and EFMLEA.
The ARP added sections 3131 through 3133 of the Code, which extend
the refundable tax credits for paid leave to non-governmental employers
with fewer than 500 employees, and certain governmental entities \1\
without regard to the number of employees, that provide paid sick and
family leave for specified reasons related to COVID-19 with respect to
periods of leave beginning on April 1, 2021, through September 30,
2021. The paid sick leave credit and the paid family leave credit
(collectively, ``paid sick and family leave credits'') under sections
3131 through 3133 are available to eligible employers that provide
employees with paid leave that would have satisfied the requirements of
EPSLA and EFMLEA, with certain modifications made pursuant to the ARP.
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\1\ Section 9641 of the ARP added sections 3131(f)(5) and
3132(f)(5) to the Code, which extend paid sick and family leave
credits to certain governmental employers (without regard to the
number of employees). However, the credits are not allowed for the
government of the United States, or any agency or instrumentality of
the United States government, except for an organization described
in section 501(c)(1) of the Code and exempt from tax under section
501(a) of the Code.
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Under section 3131, a credit is available to eligible employers who
pay qualified sick leave wages to an employee for up to 80 hours leave
provided during the period beginning April 1, 2021, and ending
September 30, 2021, if the employee is unable to work or telework
because the employee:
(1) Is subject to a Federal, State, or local quarantine or
isolation order related to COVID-19;
(2) has been advised by a health care provider to self-quarantine
due to concerns related to COVID-19;
(3) is experiencing symptoms of COVID-19 and seeking a medical
diagnosis, is seeking or awaiting the results of a diagnostic test for,
or a medical diagnosis of, COVID-19 and the employee has been exposed
to COVID-19 or the employee's employer has requested the test or
diagnosis, or the employee is obtaining immunization related to COVID-
19 or recovering from any injury, disability, illness, or condition
related to the immunization;
(4) is caring for an individual who is subject to a Federal, State,
or local quarantine or isolation order related to COVID-19, or has been
advised by a
[[Page 50638]]
health care provider to self-quarantine due to concerns related to
COVID-19;
(5) is caring for a son or daughter of such employee if the school
or place of care of the son or daughter has been closed, or the child
care provider of the son or daughter is unavailable, due to COVID-19
precautions; or
(6) is experiencing any other substantially similar condition
specified by the Secretary of Health and Human Services (HHS) in
consultation with the Secretaries of the Treasury and Labor. The
Secretary of HHS has specified, after consultation with the Secretaries
of Treasury and Labor, that a substantially similar condition is one in
which the employee takes leave:
<bullet> To accompany an individual to obtain immunization related
to COVID-19, or
<bullet> to care for an individual who is recovering from any
injury, disability, illness, or condition related to the
immunization.\2\
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\2\ For more information on the paid sick and family leave
credits, including who is an ``individual'' for purposes of this
``substantially similar'' condition, see Tax Credits for Paid Leave
Under the American Rescue Plan Act of 2021 for Leave After March 31,
2021 [verbar] Internal Revenue Service (<a href="http://irs.gov">irs.gov</a>) at <a href="https://www.irs.gov/newsroom/tax-credits-for-paid-leave-under-the-american-rescue-plan-act-of-2021-for-leave-after-march-31-2021">https://www.irs.gov/newsroom/tax-credits-for-paid-leave-under-the-american-rescue-plan-act-of-2021-for-leave-after-march-31-2021</a>.
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If an employee is unable to work or telework for reasons related to
COVID-19 described in (1), (2), or (3) above, qualified sick leave
wages are wages paid at the employee's regular rate of pay or, if
higher, the Federal minimum wage or any applicable State or local
minimum wage, up to a maximum of $511 per day and $5,110 in the
aggregate. If an employee is unable to work or telework for reasons
related to COVID-19 described in (4), (5), or (6) above, qualified sick
leave wages are two-thirds of the wages paid at the employee's regular
rate of pay or, if higher, the Federal minimum wage or any applicable
State or local minimum wage, up to a maximum of $200 per day and $2,000
in the aggregate.
Under section 3132, a credit is available to eligible employers who
pay qualified family leave wages to an employee for up to 12 weeks of
paid family leave provided during the period beginning April 1, 2021,
and ending September 30, 2021, if the employee is unable to work or
telework due to any of the conditions for which eligible employers may
provide paid sick leave. Qualified family leave wages are two-thirds of
the wages paid at the employee's regular rate of pay, up to a maximum
of $200 per day and $12,000 in the aggregate.
An eligible employer may not receive the paid family leave credit
for the same wages for which it received the paid sick leave credit.
Further, an eligible employer that receives the credits for qualified
sick leave wages under section 3131 of the Code and qualified family
leave wages under section 3132 of the Code (collectively, ``qualified
leave wages'') may not receive the employee retention credit allowed
under section 2301 of the CARES Act or section 3134 of the Code based
on the same wages. For the second calendar quarter of 2021, if an
eligible employer receives the employee retention credit under section
2301 of the CARES Act based on wages paid that are also qualified leave
wages on which the employer may claim the paid sick and family leave
credits, the employer must reduce any paid sick and family leave
credits by the amount of the credit allowed under section 2301 of the
CARES Act that is attributable to those same wages. See sections
3131(f)(3) and 3132(f)(3). For the third and fourth calendar quarters
of 2021, any qualified leave wages eligible employers take into account
for purposes of the paid sick and family leave credits may not be taken
into account for purposes of the employee retention credit under
section 3134 of the Code. See section 3134(c)(3)(D).
The paid sick and family leave credits are also reduced by the
amount of the credit allowed under section 41 (the credit for
increasing research activities) with respect to wages taken into
account for determining both the credit under section 41 and the paid
sick and family leave credits. In addition, any wages taken into
account in determining paid sick and family leave credits cannot be
taken into account as wages for purposes of the credits under sections
45A, 45P, 45S, and 51. See sections 3131(f)(3) and 3132(f)(3).
Sections 3131(f)(2) and 3132(f)(2) provide that, for purposes of
sections 3131 and 3132, respectively, the term ``wages'' means wages as
defined in section 3121(a), determined without regard to paragraphs (1)
through (22) of section 3121(b), and compensation as defined in section
3231(e), determined without regard to the sentence in section
3231(e)(1) that begins ``Such term does not include remuneration''.
Eligible employers are entitled to receive a credit equal to the amount
of qualified leave wages paid under sections 3131 and 3132. Under
sections 3131(d) and 3132(d), the credit is increased by the eligible
employer's cost of maintaining health insurance coverage allocable to
the qualified leave wages (``allocable qualified health plan
expenses''). Under sections 3131(e) and 3132(e), the credit is also
increased by certain amounts paid under collectively bargained
agreements by the eligible employer that are properly allocable to the
qualified leave wages (``certain collectively bargained
contributions''), subject to the daily and aggregate credit
limitations. The credits for the qualified leave wages and the
collectively bargained contributions combined cannot exceed the $511
daily and $5110 aggregate limitation or $200 daily and $2000 aggregate
limitation for paid sick leave and the $200 daily and $12,000 aggregate
limitation for paid family leave. However, the credit for the allocable
qualified health expenses is in addition to the credit for the
qualified leave wages and not subject to the daily and aggregate credit
limitations.
Under sections 3131 and 3132, qualified leave wages are subject to
the taxes imposed on employers by sections 3111(a) (employer's share of
social security tax), 3111(b), and 3221(a), but section 3133(a)
provides that the paid sick and family leave credits under sections
3131 and 3132 are increased by the amount of the taxes imposed by
sections 3111(a), 3111(b), and 3221(a) on qualified leave wages.
The paid sick and family leave credits under sections 3131 and 3132
are allowed against the taxes imposed on employers under section
3111(b) (the Hospital Insurance tax (Medicare tax)), and against so
much of the taxes imposed under section 3221(a) (the Railroad
Retirement Tax Act Tier 1 tax) as are attributable to the rate in
effect under section 3111(b), as applicable, on all wages and
compensation paid to all employees, and any credit amounts in excess of
these taxes are treated as an overpayment to be refunded under sections
6402(a) and 6413(b) of the Code. See sections 3131(b)(4)(A),
3131(f)(1), 3132(b)(3)(A), and 3132(f)(1).
II. Employee Retention Credit
Section 2301 of the CARES Act, as originally enacted, provides for
an employee retention credit for eligible employers, including tax-
exempt organizations, that pay qualified wages, including certain
health plan expenses, to some or all employees after March 12, 2020,
and before January 1, 2021. Section 206 of the Relief Act adopted
amendments and technical changes to section 2301 of the CARES Act for
qualified wages paid after March 12, 2020, and before January 1, 2021,
primarily expanding eligibility for certain employers to claim the
credit. Section 206 of the Relief Act is effective retroactive to the
effective date of section 2301 of the CARES Act. Section 207 of the
Relief Act, which is effective
[[Page 50639]]
for calendar quarters beginning after December 31, 2020, further amends
section 2301 of the CARES Act to extend the application of the employee
retention credit to qualified wages paid after December 31, 2020, and
before July 1, 2021, and to modify the calculation of the credit amount
for qualified wages paid during that time. Section 9651 of the ARP
enacted section 3134 of the Code, effective for calendar quarters
beginning after June 30, 2021, to provide an employee retention credit
for qualified wages paid after June 30, 2021, and before January 1,
2022. The Department of the Treasury (Treasury Department) and the
Internal Revenue Service (IRS) will continue to monitor potential
legislation related to the employee retention credit that may impact
certain rules described in this preamble.
The employee retention credit is available to any employer carrying
on a trade or business during a calendar quarter that meets the
requirements to be an eligible employer under section 3134, which
include experiencing a full or partial suspension of business
operations due to orders from an appropriate governmental authority
limiting commerce, travel, or group meetings (for commercial, social,
religious, or other purposes) due to COVID-19, experiencing a decline
in gross receipts, or qualifying as a recovery startup business.
For eligible employers that averaged more than 500 full-time
employees (within the meaning of section 4980H) during 2019 (large
eligible employers), qualified wages are wages and compensation
(including allocable qualified health plan expenses), up to $10,000 per
employee per calendar quarter, paid to employees for the time during
which they are not providing services due to a full or partial
suspension of business operations or a decline in gross receipts. For
eligible employers that averaged 500 full-time employees or fewer
during 2019 (small eligible employers), and for severely financially
distressed employers as defined in section 3134(c)(3)(C)(ii) that are
also large eligible employers, qualified wages are the wages and
compensation (including allocable qualified health plan expenses), up
to $10,000 per employee per calendar quarter, paid with respect to an
employee (regardless of whether the employee is performing services)
during any period in the calendar quarter in which the business
operations are fully or partially suspended due to a governmental order
or during any calendar quarter in which the employer is experiencing a
decline in gross receipts. If an employer was not in existence in 2019,
an employer may use the average number of full-time employees in 2020
rather than 2019. If an employer is an eligible employer due to being a
recovery startup business, the maximum aggregate employee retention
credit the employer may claim in a calendar quarter is $50,000. In the
third and fourth calendar quarters of 2021, a recovery startup business
that is a small eligible employer may treat all wages paid with respect
to an employee during the quarter as qualified wages. See Notice 2021-
49.
The same wages or compensation cannot be counted for both the paid
sick and family leave credits under sections 3131 and 3132 and the
employee retention credit under section 3134. Qualified wages for the
employee retention credit also do not include any wages taken into
account under sections 41, 45A, 45P, 45S, 51, and 1396 of the Code. See
section 3134(c)(3)(D). Additionally, qualified wages do not include
amounts taken into account as payroll costs for Paycheck Protection
Program loan forgiveness and certain grants. See section 3134(h).
Section 3134(c)(4)(A) provides that, for purposes of section 3134,
the term ``wages'' means wages as defined in section 3121(a) \3\ and
compensation as defined in section 3231(e).
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\3\ For purposes of certain governmental organizations or
entities as described in section 3134(f)(2) of the Code, wages as
defined in section 3121(a) are determined without regard to
paragraphs (5), (6), (7), (10), and (13) of section 3121(b) (except
with respect to services performed in a penal institution by an
inmate thereof).
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The employee retention credit under section 3134 is equal to 70
percent of qualified wages paid. The credit is allowed against the
taxes imposed on employers under section 3111(b), first reduced by any
tax credits allowed under sections 3131 and 3132, and against so much
of the taxes imposed under section 3221(a) as are attributable to the
rate in effect under section 3111(b), as applicable, first reduced by
any credits allowed under sections 3131 and 3132, on all wages and
compensation paid to all employees. Any credit amounts in excess of
these taxes are treated as an overpayment that shall be refunded under
sections 6402(a) and 6413(b) of the Code.
III. Refundability of Credits
Sections 3131(b)(4)(A), 3132(b)(3)(A), and 3134(b)(3) provide that
if the amount of the paid sick and family leave credits (which would
include any increases in the credits under section 3133(a)) and
employee retention credit exceeds the taxes imposed under section
3111(b) and so much of the taxes imposed under section 3221(a) as are
attributable to the rate in effect under section 3111(b), as
applicable, for any calendar quarter, after application of the other
credits previously applied, such excess shall be treated as an
overpayment that shall be refunded under sections 6402(a) and 6413(b).
Section 6402(a) generally provides that, within the applicable
period of limitations, overpayments may be credited against any
liability in respect of an internal revenue tax on the part of the
person who made the overpayment and any remaining balance refunded to
such person. Section 6413(b) provides that if more than the correct
amount of employment tax imposed by sections 3101, 3111, 3201, 3221, or
3402 is paid or deducted and the overpayment cannot be adjusted under
section 6413(a).\4\ the amount of the overpayment shall be refunded
(subject to the applicable statute of limitations) as the Secretary may
prescribe in regulations.
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\4\ Section 6413(a) addresses interest-free adjustments of
overpayments. The section provides that if more than the correct
amount of employment tax imposed by section 3101, 3111, 3201, 3221,
or 3402 is paid with respect to any payment of remuneration, proper
adjustments with respect to both the tax and the amount to be
deducted, shall be made, without interest, in such manner and at
such times as the Secretary may by regulations prescribe.
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The IRS revised Form 941, Employer's Quarterly Federal Tax Return,
Form 943, Employer's Annual Federal Tax Return for Agricultural
Employees, Form 944, Employer's Annual Federal Tax Return, and Form CT-
1, Employer's Annual Railroad Retirement Tax Return, so that employers
may use these returns to claim the paid sick and family leave credits
under sections 3131 through 3133 and the employee retention credit
under section 3134. The revised employment tax returns allow for any of
these credits in excess of the taxes imposed under section 3111(b) and
so much of the taxes imposed under section 3221(a) as are attributable
to the rate in effect under section 3111(b), as applicable, to be
credited against other employment taxes and then for any remaining
balance to be credited or refunded to the employer in accordance with
section 6402(a) or section 6413(b).
IV. Advance Payment of Credits and Erroneous Refunds
Sections 3131(b)(4)(B) and 3132(b)(3)(B) provide that, in
anticipation of the paid sick and family leave credits under these
sections (which would include any increases in the credits under
section 3133(a)), including any refundable portions, these
[[Page 50640]]
credits are to be advanced, according to forms and instructions
provided by the Secretary, up to the total allowable amount of the
credits and subject to applicable limits for the calendar quarter.
Section 3134(j)(2) provides that eligible employers for which the
average number of full-time employees (within the meaning of section
4980H) employed by the eligible employer during 2019 was not greater
than 500 may elect for any calendar quarter to receive an advance
payment of the employee retention credit for the quarter in an amount
not to exceed 70 percent of the average quarterly wages paid in
calendar year 2019.
To implement the advance payment provisions, employers that are
eligible to receive an advance of the tax credits may use IRS Form
7200, Advance Payment of Employer Credits Due To COVID-19, to request
an advance of the paid sick and family leave credits and the employee
retention credit. Employers are required to reconcile any advance
payments claimed on Form 7200 with total credits claimed and total
taxes due on their employment tax returns.
A refund or credit of any portion of these tax credits, regardless
of whether they are advanced, to a taxpayer in excess of the amount to
which the taxpayer is entitled is an erroneous refund that the employer
must repay.
V. Assessment Authority
Section 6201 authorizes the Secretary 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 section 6201(a) does not provide for the
assessment of any non-rebate \5\ portion of an erroneous refund of a
refundable tax credit, which may include a portion of the credits
available under sections 3131, 3132, and 3134, if the refund exceeds
the amounts to which an employer is properly entitled. While these
types of erroneous refunds are generally recovered or recaptured
through agreed upon voluntary repayments, setoff, or through
litigation, the Code in some instances, such as in sections 3131, 3132,
and 3134, provides for the administrative recapture of these non-rebate
refunds either by directly authorizing assessment of the erroneous non-
rebate refunds or by authorizing the promulgation of regulations or
other guidance to do so.
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\5\ As a general matter, ''non-rebate'' refers to the portion of
any refund of a tax 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).
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Specifically, with regard to the paid sick and family leave
credits, sections 3131(g) and 3132(g) provide, in relevant part, that
the Secretary will provide such regulations or other guidance as may be
necessary to carry out the purposes of the credits, including
regulations or other guidance to prevent the avoidance of the purposes
of the limitations under this provision and to recapture the benefit of
the credit in cases where there is a subsequent adjustment to the
credit. See sections 3131(g)(1), 3131(g)(4), 3132(g)(1), and
3132(g)(4). With regard to the employee retention credit, section
3134(j)(3)(B) allows for the direct assessment of certain erroneous
refunds of advanced portions of the credit by providing that if a small
eligible employer specified in section 3134(j)(2) receives excess
advance payments of the credit, then the taxes imposed under section
3111(b) or so much of the taxes imposed under section 3221(a) as are
attributable to the rate in effect under section 3111(b), as
applicable, for the calendar quarter are increased by the amount of the
excess. Section 3134(m)(3) further provides that the Secretary will
issue such forms, instructions, regulations, and other guidance as are
necessary to prevent the avoidance of the purposes of the limitations
under section 3134.
On July 29, 2020, temporary regulations (TD 9904) amending the
Employment Tax Regulations under sections 3111 and 3221 to provide for
the recapture of erroneous refunds of the paid sick and family leave
credits under the Families First Act and erroneous refunds of the
employee retention credit under the CARES Act, pursuant to the
authority granted under these acts to prescribe those regulations, were
published in the Federal Register (85 FR 45514). A notice of proposed
rulemaking (REG-111879-20) cross-referencing the temporary regulations
was published in the Federal Register on the same day (85 FR 45551).
Because the ARP did not amend the Families First Act 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 regulations are required
to provide for the recapture of the erroneous refund of these credits
pursuant to the authority granted under sections 3131, 3132, and 3134.
Accordingly, this document amends the Employment Tax Regulations
(26 CFR part 31) by adding temporary regulations under new sections
3131, 3132, and 3134 of the Code. Concurrent with the publication of
this Treasury decision, the Treasury Department and the IRS are
publishing in the Proposed Rules section of this issue of the Federal
Register a notice of proposed rulemaking (REG-109077-21) on this
subject that cross-references the text of these temporary regulations.
See section 7805(e)(1). Interested persons are directed to the
ADDRESSES and Comments and Requests for a Public Hearing sections of
the preamble to REG-109077-21 for information on submitting public
comments or requesting a public hearing on the proposed regulations.
Explanation of Provisions
Sections 3131(b)(3), 3131(b)(4)(A), 3131(f)(1), 3132(b)(2),
3132(b)(3)(A), 3132(f)(1), 3134(b)(2), 3134(b)(3), and 3134(c)(1)
provide that the credits described in these sections are taken against
the taxes imposed under section 3111(b) and so much of the taxes
imposed under section 3221(a) as are attributable to the rate in effect
under section 3111(b), as applicable, (although for the employee
retention credit, the taxes are first reduced by any paid sick and
family leave credits). Additionally, if the amount of the credits
exceeds these taxes for any calendar quarter, then the excess shall be
treated as an overpayment to be refunded or credited under sections
6402(a) and 6413(b). Any credits claimed that exceed the amount to
which the employer is entitled and that are actually credited or
refunded by the IRS are considered to be erroneous refunds of these
credits. Section 3134(j)(3)(B) provides that if a small eligible
employer specified in section 3134(j)(2) receives excess advance
payments of the credit, then the taxes imposed under section 3111(b) or
so much of the taxes imposed under section 3221(a) as are attributable
to the rate in effect under section 3111(b), as applicable, for the
calendar quarter are increased by the amount of the excess.
These temporary regulations provide that erroneous refunds of these
credits are treated as underpayments of the taxes imposed under section
3111(b) and so much of the taxes imposed under section 3221(a) as are
attributable to the rate in effect under section 3111(b), as
applicable. These temporary regulations 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 section 3111(b)
and so much of the taxes imposed under section 3221(a) as are
attributable to the rate in effect under section 3111(b), as
applicable,
[[Page 50641]]
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 and avoiding unnecessary costs and burdens
associated with litigation. These assessment and administrative
collection procedures may apply in the normal course in processing
employment tax returns that include advances in excess of claimed
credits and in examining returns for excess claimed credits. These
assessment and administrative collection procedures do not replace the
existing recapture methods, but rather represent an alternative method
available to the IRS.
Specifically, these temporary regulations provide that any amount
of the credits for qualified leave wages and certain collectively
bargained contributions under sections 3131 and 3132, plus any amount
of credits for qualified health plan expenses under sections 3131(d)
and 3132(d), and including any increases in these credits under section
3133, and any amount of the employee retention credit for qualified
wages under section 3134 of the Code that are erroneously refunded or
credited to an employer shall be treated as underpayments of the taxes
imposed under section 3111(b) and so much of the taxes imposed under
section 3221(a) as are attributable to the rate in effect under section
3111(b), as applicable, by the employer and may be administratively
assessed and collected in the same manner as the taxes. These temporary
regulations 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 3131(b)(4)(B), 3132(b)(3)(B) and 3134(j)(2).
In certain situations, third-party payors claim tax credits on
behalf of their common law employer clients. These temporary
regulations address this situation by providing that employers against
which an erroneous refund of credits may be assessed as an underpayment
include persons treated as the employer under sections 3401(d), 3504,
and 3511, consistent with their liability for the employment taxes
against which the credits applied.
Sections 3131(h) and 3132(h) provide that the paid sick and family
leave credits apply to wages paid with respect to a period of leave
taken beginning on April 1, 2021 and ending on September 30, 2021.
Section 3134(n) provides that the employee retention tax credit applies
to wages paid after June 30, 2021, and before January 1, 2022.
Pursuant to section 7805(b)(2) of the Code, these temporary
regulations are permitted to apply before the dates provided under
section 7805(b)(1), including the date on which these temporary
regulations are filed with the Federal Register, because these
temporary regulations are being issued within 18 months of the date of
the enactment of the relevant statutory provisions. Accordingly, these
temporary regulations apply to all credits under sections 3131 and
3132, including any increases to the credits under section 3133,
credited or refunded on or after April 1, 2021, including advanced
refunds, as well as all credits under section 3134 that are credited or
refunded on or after July 1, 2021, including advanced 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.
Special Analyses
The Office of Management and Budget's Office of Information and
Regulatory Analysis has determined that these temporary regulations are
not significant and not subject to review under section 6(b) of
Executive Order 12866.
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6),
the Secretary certifies that these temporary regulations will not have
a significant economic impact on a substantial number of small entities
because these temporary regulations impose no compliance burden on any
business entities, including small entities. Although these temporary
regulations will apply to all employers eligible for the tax credits
under sections 3131, 3132, and 3134, including small businesses and
tax-exempt organizations with fewer than 500 employees, and will
therefore be likely to affect a substantial number of small entities,
the economic impact will not be significant. These temporary
regulations do not affect the employer's employment tax reporting or
the necessary information to substantiate entitlement to the credits.
Rather, these temporary regulations merely implement the statutory
authority granted under sections 3131(g), 3132(g), and 3134(m) that
authorize the IRS to assess, reconcile, and recapture any portion of
the credits erroneously credited, paid, or refunded in excess of the
actual amount allowed as if the amounts were taxes imposed under
section 3111(b) and so much of the taxes imposed under section 3221(a)
as are attributable to the rate in effect under section 3111(b), as
applicable, subject to assessment and administrative collection
procedures. Notwithstanding this certification, the Treasury Department
and the IRS invite comments on any impact these temporary regulations
would have on small entities.
Pursuant to section 7805(f), these temporary regulations have been
submitted to the Chief Counsel of the Office of Advocacy of the Small
Business Administration for comment on its impact on small business.
The Treasury Department and the IRS have determined that there is
good cause to issue these regulations as temporary regulations.
Employers were required to file Form 941, Employer's Quarterly Federal
Tax Return, for the second quarter of calendar year 2021 by July 31,
2021, as required by section 6071 of the Code and Treas. Reg. Sec.
31.6071(a)-1. Employers use Form 941 to claim paid sick and family
leave credits and the employee retention credit, as well as to report
any advance of these credits they received during the calendar quarter.
In filing their second quarter 2021 Form 941, some employers may have
already received, as an advance, refund amounts in excess of the
credits to which they are entitled. In addition to the statutory
authority provided by section 3134(j)(3) with regard to erroneous
advance refunds of the employee retention credit, these temporary
regulations authorize the assessment of any erroneous refunds of the
credits. Without these temporary regulations, in some instances the IRS
may not be able to avoid bringing costly and burdensome litigation to
recover the erroneous refunds. Further, comments are being solicited in
the cross-referenced notice of proposed rulemaking that is in this
issue of the Federal Register, and any comments will be considered
before final regulations are issued.
Statement of Availability of IRS Documents
IRS notices and other guidance cited in this preamble are published
in the Internal Revenue Bulletin (or Cumulative Bulletin) and are
available from the Superintendent of Documents, U.S. Government
Publishing Office, Washington, DC 20402, or by visiting the IRS website
at <a href="http://www.irs.gov">http://www.irs.gov</a>.
[[Page 50642]]
Drafting Information
The principal author of these temporary regulations is NaLee Park,
Office of the Associate Chief Counsel (Employee Benefits, Exempt
Organizations, and Employment Taxes). However, other personnel from the
Treasury Department and the IRS participated in the development of
these temporary regulations.
List of Subjects in 26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions, Railroad
retirement, Reporting and recordkeeping requirements, Social security,
Unemployment compensation.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 31 is amended as follows:
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
0
Paragraph 1. The authority citation for part 31 is amended by adding
entries for Sec. Sec. 31.3131-1T, 31.3132-1T, and 31.3134-1T in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805.
* * * * *
Section 31.3131-1T also issued under 26 U.S.C. 3131(g).
Section 31.3132-1T also issued under 26 U.S.C. 3132(g).
Section 31.3134-1T also issued under 26 U.S.C. 3134(m)(3).
* * * * *
0
Par. 2. Section 31.3131-1T is added to read as follows:
Sec. 31.3131-1T Recapture of credits.
(a) Recapture of erroneously refunded credits. Any amount of
credits for qualified sick leave wages under section 3131(a), including
any increase to the amount of the credits under sections 3131(d),
3131(e), and 3133, that are treated as overpayments and refunded or
credited to an employer under section 6402(a) or section 6413(b) and to
which the employer is not entitled, resulting in an erroneous refund to
the employer, shall be treated as an underpayment of the taxes imposed
under section 3111(b) and so much of the taxes imposed under section
3221(a) as are attributable to the rate in effect under section
3111(b), as applicable, and may be assessed and collected by the
Secretary in the same manner as the taxes.
(b) Advance credit amounts erroneously refunded. The determination
of any amount of credits erroneously refunded as described in paragraph
(a) of this section must take into account any amount of credits
advanced to an employer under the process established by the Internal
Revenue Service in accordance with sections 3131(b)(4)(B) and
3131(g)(6).
(c) Third party payors. For purposes of this section, employers
against whom an erroneous refund of the credits under section 3131
(including any increases in those credits under section 3133), can be
assessed as an underpayment of the taxes imposed under section 3111(b)
and so much of the taxes imposed under section 3221(a) as are
attributable to the rate in effect under section 3111(b), as
applicable, include persons treated as the employer under sections
3401(d), 3504, and 3511, consistent with their liability for the
section 3111(b) or 3121(a) taxes against which the credit applied.
(d) Applicability date. This section applies to all credit refunds
under section 3131 (including any increases in those credits under
section 3133), advanced or paid on or after April 1, 2021.
0
Par. 3. Section 31.3132-1T is added to read as follows:
Sec. 31.3132-1T Recapture of credits.
(a) Recapture of erroneously refunded credits. Any amount of
credits for qualified family leave wages under sections 3132, including
any increase to the amount of the credits under sections 3132(d),
3132(e), and 3133, that are treated as overpayments and refunded or
credited to an employer under section 6402(a) or section 6413(b) and to
which the employer is not entitled, resulting in an erroneous refund to
the employer, shall be treated as an underpayment of the taxes imposed
under section 3111(b) and so much of the taxes imposed under section
3221(a) as are attributable to the rate in effect under section
3111(b), as applicable, and may be assessed and collected by the
Secretary in the same manner as the taxes.
(b) Advance credit amounts erroneously refunded. The determination
of any amount of credits erroneously refunded as described in paragraph
(a) of this section must take into account any amount of credits
advanced to an employer under the process established by the Internal
Revenue Service in accordance with sections 3132(b)(3)(B) and
3132(g)(6).
(c) Third party payors. For purposes of this section, employers
against whom an erroneous refund of the credits under section 3132
(including any increases in those credits under section 3133), can be
assessed as an underpayment of the taxes imposed under section 3111(b)
and so much of the taxes imposed under section 3121(a) as are
attributable to the rate in effect under section 3111(b), as
applicable, include persons treated as the employer under sections
3401(d), 3504, and 3511, consistent with their liability for the
section 3111(b) or 3121(a) taxes against which the credit applied.
(d) Applicability date. This section applies to all credit refunds
under section 3132 (including any increases in those credits under
section 3133) advanced or paid on or after April 1, 2021.
0
Par. 4. Section 31.3134-1T is added to read as follows:
Sec. 31.3134-1T Recapture of credits.
(a) Recapture of erroneously refunded credits. Any amount of
credits for qualified wages under section 3134 of the Code that is
treated as an overpayment and refunded or credited to an employer under
section 6402(a) or section 6413(b) of the Code and to which the
employer is not entitled, resulting in an erroneous refund to the
employer, shall be treated as an underpayment of the taxes imposed
under section 3111(b) and so much of the taxes imposed under section
3221(a) as are attributable to the rate in effect under section
3111(b), as applicable, and may be assessed and collected by the
Secretary in the same manner as the taxes.
(b) Advance credit amounts erroneously refunded. The determination
of any amount of credits erroneously refunded as described in paragraph
(a) of this section must take into account any amount of credits
advanced to an employer under the process established by the Internal
Revenue Service in accordance with sections 3134(j) and 3134(m).
(c) Third party payors. For purposes of this section, employers
against whom an erroneous refund of the credits under section 3134 can
be assessed as an underpayment of the taxes imposed under section
3111(b) and so much of the taxes imposed under section 3121(a) as are
attributable to the rate in effect under section 3111(b), as
applicable, include persons treated as the employer under sections
3401(d), 3504, and 3511, consistent with their liability for the
section 3111(b) or 3121(a) taxes against which the credit applied.
(d) Applicability date. This section applies to all credit refunds
under
[[Page 50643]]
section 3134 advanced or paid on or after July 1, 2021.
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
Approved: August 18, 2021.
Mark J. Mazur,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2021-19524 Filed 9-8-21; 4:15 pm]
BILLING CODE 4830-01-P
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</html>Indexed from Federal Register on September 10, 2021.
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