Recapture of Excess Employment Tax Credits

Post Date: 9/22/21
Last Updated: 9/22/21

Summary

Cross References
• TD 9953, September 9, 2021

The American Relief Plan Act of 2021 extended employment tax credits for paid sick and family leave, and the employee retention credit. These credits are applied against an employer’s payroll tax liability. If the amount of the credits exceeds the payroll tax liability for any calendar quarter, then the excess is treated as an overpayment to be refunded or credited.

Any credits claimed that exceed the amount to which the employer is entitled and that are actually credited or refunded by the IRS are considered to be erroneous refunds of these credits.

The IRS recently issued temporary regulations that authorize the assessment of any erroneous refund of the tax credits for paid sick and family leave, and the employee retention credit. The regulations provide that erroneous refunds of these credits are treated as underpayments of the taxes imposed under IRC section 3111(b) and so much of the taxes imposed under IRC section 3221(a) as are attributable to the rate in effect under IRC section 3111(b), as applicable.

This authorization to assess and collect underpayments of these taxes allows 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 the administrative protections afforded to taxpayers with respect to contesting their tax liabilities, and avoiding unnecessary costs and burdens associated with litigation. These assessment and administrative collection procedures may apply in the normal course in processing employment tax returns that include advances in excess of claimed credits and in examining returns for excess claimed credits. These assessments and administrative collection procedures do not replace the existing recapture methods, but rather represent an alternative method available to the IRS.

See TD 9953 for details.
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