The IRS recently finalized regulations (T.D. 9978) for recapturing erroneous refunds for COVID-19 employment credits with only minor modifications to the temporary and proposed versions released in July 2020.
The regulations apply to refunds of the paid sick and family leave credits under the Families First Act and the employee retention credit (ERC) under the CARES Act (these credits were further modified by several subsequent acts of Congress). Under the final regulations, any erroneous refunds of these “COVID-19 credits” are treated as underpayments of the applicable employment taxes and subject to specified assessment and administrative collection procedures.
The preamble to the final regulations explains that the assessment and administrative collection procedures may apply both in the processing of employment tax returns and in examining returns for excess claimed credits. In addition, these procedures are not intended to be exclusive and do not replace the existing recapture methods, but rather represent an alternative method available to the IRS.
The final regulations would also apply to any third-party payors of employment taxes on behalf of an employer, such as designated agents and professional employer organizations (PEOs). The final regulations are effective on July 24, 2023 and supersede the prior proposed and temporary regulations.
The IRS has made enforcement of employee retention credit claims a major compliance focus and IRS Commissioner Danny Werfel recently told Congress that the IRS would support legislation providing an end date for filing claims and giving it more oversight of paid preparers.
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