On July 27, 2020, the IRS published Information Release 2020-169 announcing the issuance of new temporary and proposed regulations to implement procedures to assess, reconcile, and recapture any portion of the credits under the Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) erroneously credited, paid, or refunded in excess of the actual amount allowed.

Background

The FFCRA requires employers of fewer than 500 employees to provide two types of paid leave and includes two employer social security tax credits equal to the amount of paid leave that the employer is required to provide to employees related to the COVID-19 pandemic. (See earlier coverage.) Eligible employers are entitled to fully refundable tax credits for the cost of the leave the employer is required to pay.

The CARES Act provides an employee retention credit to eligible private employers equal to 50 percent of qualified wages, defined in section 3121(a) of the Internal Revenue Code (the “Code”) (and compensation under section 3231(e) paid by employers under the Railroad Retirement Tax Act) paid after March 12, 2020, and before January 1, 2021. This credit also applies to the employer portion of social security taxes (or to taxes owed with respect to Tier 1 railroad retirement benefits). The amount of qualified wages that may be taken into account is currently limited to $10,000 per employee for all calendar quarters. If the amount of the employee retention credit exceeds applicable employment taxes, the excess is refunded to the employer, and employers are permitted to reduce their employment tax deposits in anticipation of the credit.  (See earlier coverage.)

To facilitate the administration of these refundable credits, the IRS developed Form 7200 (Advance Payment of Employer Credits Due to COVID-19) and has revised Form 941 (Employer’s Quarterly Federal Tax Return).

IRS Obligation to Recover Excess Credits Paid to Employers

Section 6201 of the Code authorizes and requires the Secretary of the Treasury to make inquiries, determinations, and assessments of all taxes under the Code, including interest, additional amounts, additions to tax, and assessable penalties.  However, the authority granted under section 6201 does not allow the IRS to assess any non-rebate portion of an erroneous refund of a refundable credit.  This refers to any remaining portion of the erroneous refund of a credit that is paid to the recipient after the refund has been applied to the recipient’s tax liability.  Rather, the IRS must generally recover or recapture such non-rebate refunds through voluntary payment or through litigation.

The statutes enacted under both FFCRA and the CARES Act were enacted off-Code (i.e., they are not part of the Internal Revenue Code), and various provisions within both Acts grant authority to Treasury and the IRS to recapture non-rebate refunds through the promulgation of regulations or other guidance.  The temporary and proposed regulations announced by the IRS on July 27, 2020, and published in the Federal Register on July 29, 2020, were issued under this statutory authority.

The Regulations

The regulations are issued under the Federal Insurance Contributions Act and the Railroad Retirement Tax Act as Treas. Reg. §§ 31.3111-6T and 31.3221-5T, respectively.  The text of the regulations is almost identical but for the statute under which each is issued.  Subsection (a) of each regulation authorizes the IRS to recapture erroneously refunded credits under FFCRA.  Subsection (b) of each regulation authorizes the IRS to recapture erroneously refunded credits under the CARES Act.  Subsection (c) of each regulation provides that any determination under subsections (a) and (b) must include any advanced credits to an employer under FFCRA and the CARES Act.  Subsection (d) applies the regulations to various third party payors treated as employers, such as statutory employers under section 3401(d) of the Code, certain agents under section 3504 of the Code, and certified professional employer organizations under section 3511 of the Code.

The regulations, which are effective for purposes of the employer credits enacted under both FFCRA and the CARES Act, allow the IRS to determine and assess taxes, additions to tax, interest, and penalties attributable to any overpaid credits to employers by treating the amounts as underpayments of payroll taxes. This treatment permits the IRS to utilize the standard assessment and administrative collection procedures applicable to payroll tax liabilities in the normal course of processing employment tax returns.  As described by the preamble to the temporary regulations: “This allows the IRS to efficiently recover the amounts, 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.”