Proposed Rule2024-14167
Recapture of Interest on Excess Credits Under the Families First Act, CARES Act, and ARP
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Published
July 2, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document sets forth proposed regulations providing that the IRS will assess as an underpayment of tax any overpayment interest paid to a taxpayer on an erroneous refund of the employment tax credits provided under the Families First Coronavirus Response Act, the Coronavirus Aid, Relief, and Economic Security Act, and the American Rescue Plan Act of 2021. These proposed regulations affect businesses, tax-exempt organizations, and certain governmental entities that claim the paid sick leave credit and the paid family leave credit under the Families First Coronavirus Response Act and the American Rescue Plan Act of 2021, and that claim the employee retention credit under the Coronavirus Aid, Relief, and Economic Security Act and the American Rescue Plan Act of 2021.
Full Text
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<title>Federal Register, Volume 89 Issue 127 (Tuesday, July 2, 2024)</title>
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[Federal Register Volume 89, Number 127 (Tuesday, July 2, 2024)]
[Proposed Rules]
[Pages 54742-54746]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-14167]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[REG-109032-23]
RIN 1545-BQ79
Recapture of Interest on Excess Credits Under the Families First
Act, CARES Act, and ARP
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document sets forth proposed regulations providing that
the IRS will assess as an underpayment of tax any overpayment interest
paid to a taxpayer on an erroneous refund of the employment tax credits
provided under the Families First Coronavirus Response Act, the
Coronavirus Aid, Relief, and Economic Security Act, and the American
Rescue Plan Act of 2021. These proposed regulations affect businesses,
tax-exempt organizations, and certain governmental entities that claim
the paid sick leave credit and the paid family leave credit under the
Families First Coronavirus Response Act and the American Rescue Plan
Act of 2021, and that claim the employee retention credit under the
Coronavirus Aid, Relief, and Economic Security Act and the American
Rescue Plan Act of 2021.
DATES: Written or electronic comments and requests for a public hearing
must be received by August 16, 2024.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically via the Federal eRulemaking Portal at <a href="http://www.regulations.gov">http://www.regulations.gov</a> (indicate IRS and REG-109032-23) by following the
online instructions for submitting comments. Requests for a public
hearing must be submitted as prescribed in the ``Comments and Requests
for a Public Hearing'' section. Once submitted to the Federal
eRulemaking Portal, comments cannot be edited or withdrawn. The
Department of the Treasury (Treasury Department) and the IRS will
publish for public availability any comments submitted to the IRS's
public docket. Send paper submissions to CC:PA:01:PR (REG-109032-23),
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations,
Andrew Holubeck at (202) 317-4774 (not a toll-free number); concerning
[[Page 54743]]
submissions of comments and/or requests for a public hearing, Vivian
Hayes by email at <a href="/cdn-cgi/l/email-protection#f9898c9b95909a919c988b90979e8ab9908b8ad79e968f"><span class="__cf_email__" data-cfemail="700005121c191318151102191e1703301902035e171f06">[email protected]</span></a> (preferred) or by phone at
(202) 317-6901 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
I. Statutes Providing Employment Tax Credits for COVID-19 Relief
The Families First Coronavirus Response Act (Families First Act),
Public Law 116-127, 134 Stat. 178 (March 18, 2020), as amended and
extended by 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), provided COVID-19 related economic relief that included paid
sick and family leave credits to eligible employers with respect to
qualified leave wages paid for a period of leave taken beginning April
1, 2020, and ending March 31, 2021. The American Rescue Plan Act of
2021 (ARP), Public Law 117-2, 135 Stat. 4 (March 11, 2021), provided
similar paid leave credits under sections 3131, 3132, and 3133 of the
Code with respect to qualified leave wages paid for a period of leave
taken beginning April 1, 2021, and ending September 30, 2021.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act),
Public Law 116-136, 134 Stat. 281 (March 27, 2020), as amended and
extended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020
(Relief Act), enacted as Division EE of the Consolidated Appropriations
Act, 2021, provided an employee retention credit (ERC) with respect to
qualified wages paid after March 12, 2020, and before July 1, 2021,
respectively. The ARP provided a substantially similar ERC under
section 3134 of the Code with respect to qualified wages paid after
June 30, 2021, and before January 1, 2022.\1\
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\1\ Section 80604 of the Infrastructure Investment and Jobs Act
(Infrastructure Act), Public Law 117-68, 135 Stat. 429 (November 15,
2021), amended section 3134(n) of the Code to provide that the ERC
under section 3134 applies only to wages paid after June 30, 2021,
and before October 1, 2021 (or, in the case of wages paid by an
eligible employer which is a recovery startup business, January 1,
2022). Therefore, the only type of employer eligible for the ERC for
wages paid after September 30, 2021, and before January 1, 2022, is
an employer that meets the definition of a recovery startup business
under section 3134(c)(5). See Notice 2021-65, 2021-51 IRB 880
(December 20, 2021) for guidance for employers that received an
advance payment of the ERC or reduced tax deposits in anticipation
of the credit for the fourth quarter of 2021 prior to the amendments
made by the Infrastructure Act.
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The paid sick and family leave credits under the Families First Act
and sections 3131 through 3133 of the Code and the ERC under the CARES
Act and section 3134 of the Code (collectively, COVID-19 credits) are
refundable credits, meaning that if the amount of the credits exceeds
the taxes against which the credits are taken, then this excess is
treated as an overpayment that is refunded under sections 6402(a) and
6413(b). Any amount of the COVID-19 credits claimed by a taxpayer that
is treated as an overpayment under section 6402(a) or section 6413(b),
is refunded or credited to the taxpayer. Any such refund to which the
taxpayer is not entitled, is an erroneous refund that the taxpayer must
repay.
II. Assessment Authority
Section 6201 authorizes and requires the Secretary to determine and
assess tax liabilities, including interest, additional amounts,
additions to the tax, and assessable penalties. The Code or other
statutory authority described herein provides for the administrative
recapture of certain erroneous refunds of the COVID-19 credits either
by directly authorizing the assessment of the erroneous refunds or by
authorizing the promulgation of regulations or other guidance to do so.
Specifically, regarding paid sick and family leave credits,
sections 7001(f) and 7003(f) of the Families First Act and sections
3131(g) and 3132(g) of the Code provide, in relevant part, that the
Secretary shall 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 those provisions and to recapture the benefit
of the credit where there is a subsequent adjustment to the credit.
Regarding the ERC, section 2301(l) of the CARES Act, as amended by
sections 206 and 207 of the Relief Act, provides that the Secretary
shall issue such forms, instructions, regulations, and other guidance
as are necessary to prevent the avoidance of the purposes of the
limitations under section 2301 of the CARES Act. Correspondingly,
section 3134(m)(3) of the Code provides, in relevant part, that the
Secretary shall issue such forms, instructions, regulations, and other
guidance as are necessary to prevent the avoidance of the purposes of
the limitations under section 3134.
III. Regulations for the Recapture of Erroneous Refunds of COVID-19
Credits
Under the authority provided by the Families First Act, the CARES
Act, and the ARP, the Treasury Department and the IRS published
regulations (TD 9978) in the Federal Register on July 26, 2023 (88 FR
48118) under sections 3111, 3131, 3132, 3134, and 3221 of the Code
(collectively, Recapture Regulations) that provide for the
administrative recapture of erroneously refunded COVID-19 credits.
Under the Recapture Regulations, erroneous refunds of COVID-19 credits
are treated as underpayments of the taxes imposed under section 3111(a)
or (b), as applicable, and so much of the taxes imposed under section
3221(a) as are attributable to the rate in effect under section 3111(a)
or (b), as applicable, and are, therefore, subject to assessment and
administrative collection procedures. The Recapture Regulations allow
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.
IV. Interest on Overpayments Under Section 6611
Section 6611 provides that interest shall be allowed and paid on
any overpayment in respect of any Internal Revenue tax at the
overpayment rate established under section 6621. Section 6611(b)(2)
provides that interest shall be allowed and paid in the case of a
refund from the date of the overpayment to a date (determined by the
Secretary) preceding the date of the refund check by not more than 30
days. When a taxpayer files an amended return, such as Form 941-X,
Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund,
claiming COVID-19 credits that were not claimed on the originally filed
return and resulting in an overpayment, interest is allowed under
section 6611 on any overpayment refunded to the taxpayer.
While the Recapture Regulations provide for the assessment of
erroneous refunds of COVID-19 credits as an underpayment of certain
employment taxes, they do not address overpayment interest paid to a
taxpayer on an erroneous refund. These proposed regulations provide for
the assessment of this interest as an underpayment of tax.
The Families First Act, CARES Act, and the Code as amended by the
ARP authorize and require the Secretary to issue regulations to prevent
the avoidance of the limitations placed on the credits by these
statutes. When a
[[Page 54744]]
taxpayer is issued an erroneous refund of COVID-19 credits for which
the taxpayer is not eligible, the taxpayer incurs a liability to repay
that refund. The taxpayer also incurs a liability to repay any
overpayment interest paid on the erroneous refund. In pursuing
collection of these liabilities, the IRS is enforcing the statutory
limitations on the COVID-19 credits that made the taxpayer's refund,
and any accompanying overpayment interest, erroneous. Regulations
providing for the administrative recapture of overpayment interest paid
on refunds subsequently determined to be erroneous assist in resolving
taxpayers' repayment liabilities while also preserving administrative
protections afforded to these taxpayers with respect to contesting
their tax liabilities under the Code and avoiding unnecessary costs and
burdens associated with litigation.
Accordingly, under the authority granted by the Families First Act,
CARES Act, and the Code, these proposed regulations would amend the
Employment Tax Regulations (26 CFR part 31) under sections 3111, 3131,
3132, 3134, and 3221 to provide that overpayment interest paid to
taxpayers on erroneous refunds of COVID-19 credits is treated as an
underpayment of the applicable employment taxes and may be assessed and
collected by the IRS in the same manner as the taxes.
Explanation of Provisions
These proposed regulations would provide that any overpayment
interest paid under section 6611 to an employer for an erroneous refund
of the COVID-19 credits will be treated as an underpayment of the taxes
imposed under section 3111(a) or (b), as applicable, and so much of the
taxes imposed under section 3221(a) as are attributable to the rate in
effect under section 3111(a) or (b), as applicable, and may be assessed
and collected by the Secretary in the same manner as the taxes. These
proposed regulations would be applicable to all interest amounts paid
under section 6611 on or after July 2, 2024 for any erroneous refund of
the COVID-19 credits.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6),
the Secretary certifies that these proposed regulations would not have
a significant economic impact on a substantial number of small entities
because these proposed regulations impose no compliance burden on any
business entities, including small entities. Although these proposed
regulations would apply to all taxpayers eligible for the employment
tax credits under the Families First Act, the CARES Act, and sections
3131, 3132, and 3134 of the Code, including small businesses and tax-
exempt organizations with fewer than 500 employees, and would therefore
be likely to affect a substantial number of small entities, the
economic impact would not be significant. These proposed regulations do
not affect the taxpayer's employment tax reporting or the necessary
information to substantiate entitlement to the credits. Rather, these
proposed regulations merely implement the statutory authority granted
under the Families First Act, the CARES Act, and the Code as amended by
the ARP to issue regulations or other guidance to prevent the avoidance
of the purposes of the limitations under these provisions by providing
that overpayment interest paid to taxpayers on erroneous refunds of
COVID-19 credits is treated as an underpayment of the applicable
employment taxes and may be assessed and collected by the IRS in the
same manner as the taxes.
III. Section 7805(f)
Pursuant to section 7805(f) of the Code, these proposed 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.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. These proposed regulations do not include any Federal
mandate that may result in expenditures by State, local, or Tribal
governments, or by the private sector, in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These proposed regulations do not
have federalism implications, do not impose substantial direct
compliance costs on State and local governments, and do not preempt
State law within the meaning of the Executive order.
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="https://www.irs.gov">https://www.irs.gov</a>.
Comments and Requests for a Public Hearing
Before these proposed amendments to the final regulations are
adopted as final regulations, consideration will be given to any
comments that are submitted timely to the IRS as prescribed in this
preamble under the ADDRESSES heading. The Treasury Department and the
IRS request comments on all aspects of the proposed regulations. Any
comments submitted will be available at <a href="https://www.regulations.gov">https://www.regulations.gov</a> or
upon request. A public hearing will be scheduled if requested in
writing by any person who timely submits electronic or written
comments. Requests for a public hearing are also encouraged to be made
electronically. If a public hearing is scheduled, notice of the date,
time, and place for the public hearing will be published in the Federal
Register.
Drafting Information
The principal author of these proposed 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 proposed regulations.
List of Subjects in 26 CFR 31
Employment taxes, Fishing vessels, Gambling, Income taxes,
Penalties, Pensions, Railroad retirement, Reporting and recordkeeping
requirements, Social security, Unemployment compensation.
[[Page 54745]]
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 31 as follows:
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
0
Paragraph 1.The authority citation for part 31 continues to read in
part as follows:
Authority: 26 U.S.C. 7805.
* * * * *
Section 31.3111-6 also issued under secs. 7001 and 7003, Public
Law 116-127, 134 Stat. 178, and sec. 2301, Public Law 116-136, 134
Stat. 281.
* * * * *
Section 31.3131-1 also issued under 26 U.S.C. 3131(g).
Section 31.3132-1 also issued under 26 U.S.C. 3132(g).
Section 31.3134-1 also issued under 26 U.S.C. 3134(m)(3).
Section 31.3221-5 also issued under secs. 7001 and 7003, Public
Law 116-127, 134 Stat. 178, and sec. 2301, Public Law 116-136, 134
Stat. 281.
* * * * *
0
Par. 2. Section 31.3111-6 is amended by:
0
a. Redesignating paragraph (e) as paragraph (f) and adding new
paragraph (e); and
0
b. Revising newly redesignated paragraph (f).
The addition and revision read as follows:
Sec. 31.3111-6 Recapture of credits under the Families First
Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic
Security Act.
* * * * *
(e) Recapture of interest on erroneously refunded credits under the
Families First Act and CARES Act. For purposes of this section, any
overpayment interest paid under section 6611 to an employer, or any
third party payor as described in paragraph (d) of this section, with
respect to an erroneous refund amount described in paragraph (a) or (b)
of this section shall also be treated as an underpayment of the taxes
imposed under section 3111(a) of the Code and may be assessed and
collected by the Secretary in the same manner as the taxes.
(f) Applicability date. This section applies to all credit refunds
under sections 7001 and 7003 of the Families First Act (including any
increases in those credits under section 7005 of the Families First
Act), as modified by section 3606 of the CARES Act, advanced or paid on
or after July 24, 2020, and all credit refunds under section 2301 of
the CARES Act advanced or paid on or after July 24, 2020, except that
paragraph (e) of this section applies to all interest amounts paid
under section 6611 on or after July 2, 2024 for any erroneous refund
described in paragraph (a) or (b) of this section.
0
Par. 3. Section 31.3131-1 is amended by:
0
a. Redesignating paragraph (d) as paragraph (e) and adding new
paragraph (d); and
0
b. Revising the newly redesignated paragraph (e).
The addition and revision read as follows:
Sec. 31.3131-1 Recapture of credits.
* * * * *
(d) Recapture of interest on erroneously refunded credits. For
purposes of this section, any overpayment interest paid under section
6611 to an employer, or any third party payor as described in paragraph
(c) of this section, with respect to an erroneous refund amount
described in paragraph (a) of this section shall also 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.
(e) 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 September 8, 2021, except
that paragraph (d) of this section applies to all interest amounts paid
under section 6611 on or after July 2, 2024 for any erroneous refund
described in paragraph (a) of this section.
0
Par. 4. Section 31.3132-1 is amended by:
0
a. Redesignating paragraph (d) as paragraph (e) and adding new
paragraph (d); and
0
b. Revising the newly redesignated paragraph (e).
The addition and revision read as follows:
Sec. 31.3132-1 Recapture of credits.
* * * * *
(d) Recapture of interest on erroneously refunded credits. For
purposes of this section, any overpayment interest paid under section
6611 to an employer, or any third party payor as described in paragraph
(c) of this section, with respect to an erroneous refund amount
described in paragraph (a) of this section shall also 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.
(e) 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 September 8, 2021, except
that paragraph (d) of this section applies to all interest amounts paid
under section 6611 on or after July 2, 2024 for any erroneous refund
described in paragraph (a) of this section.
0
Par. 5. Section 31.3134-1 is amended by:
0
a. Redesignating paragraph (d) as paragraph (e) and adding new
paragraph (d); and
0
b. Revising the newly redesignated paragraph (e).
The addition and revision read as follows:
Sec. 31.3134-1 Recapture of credits.
* * * * *
(d) Recapture of interest on erroneously refunded credits. For
purposes of this section, any overpayment interest paid under section
6611 to an employer, or any third party payor as described in paragraph
(c) of this section, with respect to an erroneous refund amount
described in paragraph (a) of this section shall also 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.
(e) Applicability date. This section applies to all credit refunds
under section 3134 advanced or paid on or after September 8, 2021,
except that paragraph (d) of this section applies to all interest
amounts paid under section 6611 on or after July 2, 2024 for any
erroneous refund described in paragraph (a) of this section.
0
Par. 6. Section 31.3221-5 is amended by:
0
a. Redesignating paragraph (e) as paragraph (f) and adding new
paragraph (e); and
0
b. Revising the newly redesignated paragraph (f).
The addition and revision read as follows:
[[Page 54746]]
Sec. 31.3221-5 Recapture of credits under the Families First
Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic
Security Act.
* * * * *
(e) Recapture of interest on erroneously refunded credits under the
Families First Act and CARES Act. For purposes of this section, any
overpayment interest paid under section 6611 to an employer, or any
third party payor as described in paragraph (d) of this section, with
respect to an erroneous refund amount described in paragraph (a) or (b)
of this section shall also be treated as an underpayment of the taxes
imposed under section 3221(a) and may be assessed and collected by the
Secretary in the same manner as the taxes.
(f) Applicability date. This section applies to all credit refunds
under sections 7001 and 7003 of the Families First Act, as modified by
section 3606 of the CARES Act, advanced or paid on or after July 24,
2020, and all credit refunds under section 2301 of the CARES Act
advanced or paid on or after July 24, 2020, except paragraph (e) of
this section applies to all interest amounts paid under section 6611 on
or after July 2, 2024 for any erroneous refund described in paragraph
(a) or (b) of this section.
Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2024-14167 Filed 7-1-24; 8:45 am]
BILLING CODE 4830-01-P
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