Final Regulations Allow Assessment of Erroneous COVID-19-related Tax Credit Refunds
The U.S. Department of the Treasury and the IRS recently issued final regulations T.D. 9978 allowing the assessment of erroneous COVID-19-related tax credit refunds.
The regulations 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. They finalize earlier proposed regulations REG-111879-20 and REG-109077-21 with minor modifications.
The final regulations state 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), meaning that assessment and administrative collection procedures apply.
Assessment and administrative collection procedures may apply both in the processing of employment tax returns and in the examining of returns for excess claimed credits, and they do not replace existing recapture methods.
The regulations’ preamble notes that, in certain circumstances, third-party payers sometimes claim tax credits on behalf of their common law employer clients. The 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.
The final regulations also clarify the proposed regulations by specifically stating the common law employer clients of 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 clarifies that the existing rules in Secs. 3504 and 3511(c) regarding the liability of common law employer clients of third-party payers remain applicable in this situation.