On July 27, 2020, the IRS issued temporary and proposed regulations, providing guidance on the recapture of excess employment tax credits that are claimed under the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES). These regulations aim to implement procedures to assess, reconcile, and recapture any portion of the credits under the FFCRA and the CARES that are erroneously credited, paid, or refunded more than the actual amount allowed. As taxpayers may have inadvertently claimed or computed tax credits in excess of what they are eligible to receive, the regulations clarify how they may correct this, so that the IRS may recover excess credit amounts received by taxpayers.
FFCRA and CARES Act
FFCRA was enacted on March 18, 2020, providing businesses with refundable tax credits to reimburse them for the costs of paid sick and family leave wages to their employees for COVID-19 related leave. CARES Act was introduced on March 27, 2020, to encourage eligible employers to keep employees on their payroll, despite economic difficulties caused by COVID-19, by providing eligible employers with an employee retention tax credit. Eligible employers may be entitled to tax credits under both FFCRA and the CARES Act but not for the same wages.
The FFCRA requires employers of fewer than 500 employees to provide two types of paid leave. It includes two employer social security tax credits equal to the amount of paid leave that the employer is required to provide to employees due to the COVID-19 pandemic. Eligible employers are entitled to fully refundable tax credits for the cost of the leave that 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 paid after March 12, 2020, and before January 1, 2021. This credit also applies to the employer portion of social security taxes. 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. Also, employers are permitted to reduce their employment tax deposits in anticipation of the credit.Find out how to maintain effective tax compliance with this detailed guide that helps you understand your employment tax obligations to ensure reducing your costs.
Revision of Employment Tax Forms
The IRS is in the process of changing the Form 941, Form 943, Form 944 and Form CT-1, so employers can use these returns to claim the paid sick and family leave and employee retention credits.
Employers may also receive an advance payment of the credits up to the total allowable amounts. The IRS has created Form 7200, Advance Payment of Employer Credits Due to COVID-19, which employers can use to ask for an advance of the tax credits. However, employers have to reconcile any advance payments claimed on Form 7200 with the total amount of credits claimed and total taxes due on their employment tax returns. Any refund of the credits paid to a taxpayer that surpasses the amount permitted to the taxpayer is considered an erroneous refund. As a result, the IRS has to seek repayment.
Excess Employment Tax Credits Regulations
The text of the regulations is almost identical and includes the following subsections:
- Each regulation authorizes the IRS to recapture erroneously refunded credits under FFCRA,
- Each regulation authorizes the IRS to recapture erroneously refunded credits under the CARES Act,
- 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, and
- The regulations apply to various third party payers 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 IRS Regulations clarify what happens if an employer requests an advance payment of a refund or files an employment tax return claiming tax credits in excess of what it was entitled to claim. Under the Regulations, any refund, credit, or advance that exceeds the amount the employer is entitled to receive is considered an erroneous refund. Such refunds will be treated as an underpayment of the social security taxes and employers will need to repay any erroneous refunds at the same time, and in the same manner, as they pay their quarterly employment tax liabilities. The Regulations also authorize the assessment and collection of erroneous refunds as part of the processing of the applicable quarterly employment tax return. If an employer is requesting a subsequent advance payment using Form 7200, any erroneous refunds can also be deducted from the advance payment the employer is eligible to receive.
Complying with IRS Regulations
The IRS regulations authorize the assessment of erroneous refunds of the credits paid under the FFCRA and CARES Act, created to provide tax relief in response to the novel coronavirus pandemic. This allows the IRS to determine and assess taxes, additions to tax, interest, and penalties for any overpaid credits to employers by treating the amounts as underpayments of employment taxes.
Employers should be diligent in their record-keeping and be prepared to support any credits claimed or payments received in the event the IRS challenges the claimed credits or advances. Furthermore, they need to pay attention to revisions of employment tax forms and take necessary measures in case they discover an error in the number of credits claimed on a quarterly return. To ensure constant tax compliance and prevent any penalties, employers can outsource employment tax management. Thus, they can prevent incorrect information, speed up the entire process, keep all information safe, and stay up-to-date with the changing IRS regulations and tax laws.