Recapture of Interest on Excess Credits Under the Families First Act, CARES Act, and ARP

DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 31</CFR> <DEPDOC>[REG-109032-23]</DEPDOC> <RIN>RIN 1545-BQ79</RIN> <SUBJECT>Recapture of Interest on Excess Credits Under the Families First Act, CARES Act, and ARP</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking. <SUM> <HD SOURCE="HED">SUMMARY:</HD> 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. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Written or electronic comments and requests for a public hearing must be received by August 16, 2024. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at <E T="03">http://www.regulations.gov</E> (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 Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn.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. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning these proposed regulations, Andrew Holubeck at (202) 317-4774 (not a toll-free number); concerning submissions of comments and/or requests for a public hearing, Vivian Hayes by email at <E T="03">publichearings@irs.gov</E> (preferred) or by phone at (202) 317-6901 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Background</HD> <HD SOURCE="HD2">I. Statutes Providing Employment Tax Credits for COVID-19 Relief</HD> 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. <SU>1</SU> <FTREF/> <FTNT> <SU>1</SU>  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). <E T="03">See</E> Notice 2021-65 <E T="03">,</E> 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. </FTNT> 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. <HD SOURCE="HD2">II. Assessment Authority</HD> 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. <HD SOURCE="HD2">III. Regulations for the Recapture of Erroneous Refunds of COVID-19 Credits</HD> 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 <E T="04">Federal Register</E> 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. <HD SOURCE="HD2">IV. Interest on Overpayments Under Section 6611</HD> 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, <E T="03">Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund,</E> 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 regul ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 26k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━