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

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

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.

DATES:

Written or electronic comments and requests for a public hearing must be received by August 16, 2024.

ADDRESSES:

Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at http://www.regulations.gov (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 Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn.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.

FOR FURTHER INFORMATION CONTACT:

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 publichearings@irs.gov (preferred) or by phone at (202) 317-6901 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

I. Statutes Providing Employment Tax Credits for COVID-19 Relief

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.

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.

II. Assessment Authority

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.

III. Regulations for the Recapture of Erroneous Refunds of COVID-19 Credits

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 Federal Register 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.

IV. Interest on Overpayments Under Section 6611

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, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, 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 regulations provide for the assessment of this interest as an underpayment of tax.

The Families First Act, CARES Act, and the Code as amended by the ARP authorize and require the Secretary to issue regulations to prevent the avoidance of the limitations placed on the credits by these statutes. When a taxpayer is issued an erroneous refund of COVID-19 credits for which the taxpayer is not eligible, the taxpayer incurs a liability to repay that refund. The taxpayer also incurs a liability to repay any overpayment interest paid on the erroneous refund. In pursuing collection of these liabilities, the IRS is enforcing the statutory limitations on the COVID-19 credits that made the taxpayer's refund, and any accompanying overpayment interest, erroneous. Regulations providing for the administrative recapture of overpayment interest paid on refunds subsequently determined to be erroneous assist in resolving taxpayers' repayment liabilities while also preserving administrative protections afforded to these taxpayers with respect to contesting their tax liabilities under the Code and avoiding unnecessary costs and burdens associated with litigation.

Accordingly, under the authority granted by the Families First Act, CARES Act, and the Code, these proposed regulations would amend the Employment Tax Regulations (26 CFR part 31) under sections 3111, 3131, 3132, 3134, and 3221 to provide that overpayment interest paid to taxpayers on erroneous refunds of COVID-19 credits is treated as an underpayment of the applicable employment taxes and may be assessed and collected by the IRS in the same manner as the taxes.

Explanation of Provisions

These proposed regulations would provide that any overpayment interest paid under section 6611 to an employer for an erroneous refund of the COVID-19 credits will be treated as an underpayment 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 may be assessed and collected by the Secretary in the same manner as the taxes. These proposed regulations would be applicable to all interest amounts paid under section 6611 on or after July 2, 2024 for any erroneous refund of the COVID-19 credits.

Special Analyses

I. Regulatory Planning and Review—Economic Analysis

Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required.

II. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), the Secretary certifies that these proposed regulations would not have a significant economic impact on a substantial number of small entities because these proposed regulations impose no compliance burden on any business entities, including small entities. Although these proposed regulations would apply to all taxpayers eligible for the employment tax credits under the Families First Act, the CARES Act, and sections 3131, 3132, and 3134 of the Code, including small businesses and tax-exempt organizations with fewer than 500 employees, and would therefore be likely to affect a substantial number of small entities, the economic impact would not be significant. These proposed regulations do not affect the taxpayer's employment tax reporting or the necessary information to substantiate entitlement to the credits. Rather, these proposed regulations merely implement the statutory authority granted under the Families First Act, the CARES Act, and the Code as amended by the ARP to issue regulations or other guidance to prevent the avoidance of the purposes of the limitations under these provisions by providing that overpayment interest paid to taxpayers on erroneous refunds of COVID-19 credits is treated as an underpayment of the applicable employment taxes and may be assessed and collected by the IRS in the same manner as the taxes.

III. Section 7805(f)

Pursuant to section 7805(f) of the Code, these proposed regulations have been submitted to the Chief Counsel of the Office of Advocacy of the Small Business Administration for comment on its impact on small business.

IV. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. These proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector, in excess of that threshold.

V. Executive Order 13132: Federalism

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. These proposed regulations do not have federalism implications, do not impose substantial direct compliance costs on State and local governments, and do not preempt State law within the meaning of the Executive order.

Statement of Availability of IRS Documents

IRS notices and other guidance cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

Comments and Requests for a Public Hearing

Before these proposed amendments to the final regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. Any comments submitted will be available at https://www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are also encouraged to be made electronically. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

Drafting Information

The principal author of these proposed regulations is NaLee Park, Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Treasury Department and the IRS participated in the development of these proposed regulations.

List of Subjects in 26 CFR 31

• Employment taxes
• Fishing vessels
• Gambling
• Income taxes
• Penalties
• Pensions
• Railroad retirement
• Reporting and recordkeeping requirements
• Social security
• Unemployment compensation

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 31 as follows:

PART 31—EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

Paragraph 1. The authority citation for part 31 continues to read in part as follows:

Authority: 26 U.S.C. 7805.

Section 31.3111-6 also issued under secs. 7001 and 7003, Public Law 116-127, 134 Stat. 178, and sec. 2301, Public Law 116-136, 134 Stat. 281.

Section 31.3131-1 also issued under 26 U.S.C. 3131(g).

Section 31.3132-1 also issued under 26 U.S.C. 3132(g).

Section 31.3134-1 also issued under 26 U.S.C. 3134(m)(3).

Section 31.3221-5 also issued under secs. 7001 and 7003, Public Law 116-127, 134 Stat. 178, and sec. 2301, Public Law 116-136, 134 Stat. 281.

Par. 2. Section 31.3111-6 is amended by:

a. Redesignating paragraph (e) as paragraph (f) and adding new paragraph (e); and

b. Revising newly redesignated paragraph (f).

The addition and revision read as follows:

Par. 3. Section 31.3131-1 is amended by:

a. Redesignating paragraph (d) as paragraph (e) and adding new paragraph (d); and

b. Revising the newly redesignated paragraph (e).

The addition and revision read as follows:

Par. 4. Section 31.3132-1 is amended by:

a. Redesignating paragraph (d) as paragraph (e) and adding new paragraph (d); and

b. Revising the newly redesignated paragraph (e).

The addition and revision read as follows:

Par. 5. Section 31.3134-1 is amended by:

a. Redesignating paragraph (d) as paragraph (e) and adding new paragraph (d); and

b. Revising the newly redesignated paragraph (e).

The addition and revision read as follows:

Par. 6. Section 31.3221-5 is amended by:

a. Redesignating paragraph (e) as paragraph (f) and adding new paragraph (e); and

b. Revising the newly redesignated paragraph (f).

The addition and revision read as follows: