Proposed regs. address interest recapture on excess COVID-19 credits

Proposed regulations issued Monday (REG-109032-23) provide that the IRS will assess and collect as an underpayment of employment taxes any overpayment interest paid to a taxpayer on an erroneous refund of COVID-19 credits.

The proposed regulations apply to the paid sick leave credit and the paid family leave credit under the Families First Coronavirus Response Act, P.L. 116-127, and the American Rescue Plan Act (ARPA) of 2021, P.L. 117-2, and the employee retention credit (ERC) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and ARPA. They affect businesses, tax-exempt organizations, and certain governmental entities that claim those credits.

Under the proposed regulations, any overpayment interest paid under Sec. 6611 to an employer for an erroneous refund of the COVID-19 credits would be treated as an underpayment of employment taxes paid under Sec. 3111(a), Sec. 3111(b), or Sec. 3221(a), as applicable, and may be assessed and collected by the IRS in the same manner as employment taxes.

Final regulations issued in July 2023 (T.D. 9978) authorized the assessment of erroneous refunds of paid sick leave credits, family leave credits, and ERCs paid to employers under the same COVID-19 stimulus laws. But they did not address overpayment interest paid to a taxpayer on an erroneous refund, so the proposed regulations provide for the assessment of this interest as an underpayment of tax.

The regulations would apply to interest paid on or after Tuesday, July 2.

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