Final regs. allow assessment of COVID-19 related tax credit refunds

Final regulations issued Monday (T.D. 9978) authorize the assessment of erroneous refunds of paid sick leave credits, family leave credits, and employee retention credits paid to employers under the Families First Coronavirus Response Act, P.L. 116-127; the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136; and the American Rescue Plan Act of 2021, P.L. 117-2.

These regulations finalize earlier proposed regulations (REG-111879-20 and REG-109077-21) with minor modifications. They provide that erroneous refunds of COVID-19 credits will be treated as underpayments of taxes imposed under Sec. 3111(a) or 3111(b), as applicable, and are subject to taxes imposed under Sec. 3221(a), which means assessment and administrative collection procedures apply.

The preamble to the regulations states, “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 both in the processing of employment tax returns and in examining returns for excess claimed credits; they are not exclusive and do not replace the existing recapture methods. Instead, they are an alternative method that the IRS has at its disposal to recover erroneous refunds of tax credits for employee retention, family leave, and sick leave.

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

In addition, the final regulations clarify the proposed regulations by expressly stating that the common law employer clients of these third-party payers that remain subject to all provisions of law applicable to employers with respect to the payment of wages or compensation, as applicable, may also be assessed for an erroneous refund of credits. This clarification makes clear to employers that the existing rules in Secs. 3504 and 3511(c) concerning the liability of common law employer clients of third-party payers remain applicable in this situation.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.