Recapture of Excess Employment Tax Credits Under the American Relief Plan Act of 2021, 50637-50643 [2021-19524]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 86, Number 173 (Friday, September 10, 2021)]
[Rules and Regulations]
[Pages 50637-50643]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-19524]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 31

[TD 9953]
RIN 1545-BQ09


Recapture of Excess Employment Tax Credits Under the American 
Relief Plan Act of 2021

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document sets forth temporary regulations under sections 
3131, 3132, and 3134 of the Internal Revenue Code (Code), added by 
sections 9641 and 9651 of the American Rescue Plan Act of 2021. These 
temporary regulations authorize the assessment of any erroneous refund 
of the tax credits paid under sections 3131, 3132 (including any 
increases in those credits under section 3133), and 3134 of the Code. 
The text of these temporary regulations also serves as the text of the 
proposed regulations (REG-109077-21) set forth in the notice of 
proposed rulemaking on this subject in the Proposed Rules section of 
this issue of the Federal Register.

DATES: 
    Effective date: These temporary regulations are effective on 
September 10, 2021.
    Applicability date: For date of applicability, see Sec. Sec.  
31.3131-1T, 31.3132-1T, and 31.3134-1T of these temporary regulations.

FOR FURTHER INFORMATION CONTACT: Concerning these temporary 
regulations, NaLee Park at 202-317-6798.

SUPPLEMENTARY INFORMATION:

Background

    The Families First Coronavirus Response Act (Families First Act), 
Public Law 116-127, 134 Stat. 178 (March 18, 2020), the Coronavirus 
Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 
134 Stat. 281 (March 27, 2020), 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), the Taxpayer Certainty and Disaster 
Relief Tax Act of 2020 (Relief Act), enacted as Division EE of the 
Consolidated Appropriations Act, 2021, and the American Rescue Plan Act 
of 2021 (the ARP), Public Law 117-2, 135 Stat. 4 (March 11, 2021), 
provide relief to taxpayers from economic hardships resulting from the 
Coronavirus Disease 2019 (COVID-19). As described below, this relief 
includes employment tax credits for certain wages paid by employers.

I. Paid Sick and Family Leave Credits

    The Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family 
and Medical Leave Expansion Act (EFMLEA), enacted as Divisions E and C 
of the Families First Act, respectively, generally required employers 
with fewer than 500 employees to provide paid leave due to certain 
circumstances related to COVID-19. Sections 7001 and 7003 of the 
Families First Act generally provided that non-governmental employers 
subject to the paid leave requirements under EPSLA and EFMLEA were 
entitled to fully refundable tax credits to cover the wages paid for 
leave taken for those periods of time during which employees are unable 
to work or telework for specified reasons related to COVID-19, plus 
allocable qualified health plan expenses.
    Although the requirement to provide employees with paid leave under 
EPSLA and EFMLEA expired December 31, 2020, the tax credits for 
qualified leave wages paid for periods of leave taken beginning on 
April 1, 2020, and ending on December 31, 2020, were extended by the 
Tax Relief Act through March 31, 2021, for paid leave that would have 
satisfied the requirements of EPSLA and EFMLEA.
    The ARP added sections 3131 through 3133 of the Code, which extend 
the refundable tax credits for paid leave to non-governmental employers 
with fewer than 500 employees, and certain governmental entities \1\ 
without regard to the number of employees, that provide paid sick and 
family leave for specified reasons related to COVID-19 with respect to 
periods of leave beginning on April 1, 2021, through September 30, 
2021. The paid sick leave credit and the paid family leave credit 
(collectively, ``paid sick and family leave credits'') under sections 
3131 through 3133 are available to eligible employers that provide 
employees with paid leave that would have satisfied the requirements of 
EPSLA and EFMLEA, with certain modifications made pursuant to the ARP.
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    \1\ Section 9641 of the ARP added sections 3131(f)(5) and 
3132(f)(5) to the Code, which extend paid sick and family leave 
credits to certain governmental employers (without regard to the 
number of employees). However, the credits are not allowed for the 
government of the United States, or any agency or instrumentality of 
the United States government, except for an organization described 
in section 501(c)(1) of the Code and exempt from tax under section 
501(a) of the Code.
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    Under section 3131, a credit is available to eligible employers who 
pay qualified sick leave wages to an employee for up to 80 hours leave 
provided during the period beginning April 1, 2021, and ending 
September 30, 2021, if the employee is unable to work or telework 
because the employee:
    (1) Is subject to a Federal, State, or local quarantine or 
isolation order related to COVID-19;
    (2) has been advised by a health care provider to self-quarantine 
due to concerns related to COVID-19;
    (3) is experiencing symptoms of COVID-19 and seeking a medical 
diagnosis, is seeking or awaiting the results of a diagnostic test for, 
or a medical diagnosis of, COVID-19 and the employee has been exposed 
to COVID-19 or the employee's employer has requested the test or 
diagnosis, or the employee is obtaining immunization related to COVID-
19 or recovering from any injury, disability, illness, or condition 
related to the immunization;
    (4) is caring for an individual who is subject to a Federal, State, 
or local quarantine or isolation order related to COVID-19, or has been 
advised by a

[[Page 50638]]

health care provider to self-quarantine due to concerns related to 
COVID-19;
    (5) is caring for a son or daughter of such employee if the school 
or place of care of the son or daughter has been closed, or the child 
care provider of the son or daughter is unavailable, due to COVID-19 
precautions; or
    (6) is experiencing any other substantially similar condition 
specified by the Secretary of Health and Human Services (HHS) in 
consultation with the Secretaries of the Treasury and Labor. The 
Secretary of HHS has specified, after consultation with the Secretaries 
of Treasury and Labor, that a substantially similar condition is one in 
which the employee takes leave:
     To accompany an individual to obtain immunization related 
to COVID-19, or
     to care for an individual who is recovering from any 
injury, disability, illness, or condition related to the 
immunization.\2\
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    \2\ For more information on the paid sick and family leave 
credits, including who is an ``individual'' for purposes of this 
``substantially similar'' condition, see Tax Credits for Paid Leave 
Under the American Rescue Plan Act of 2021 for Leave After March 31, 
2021 [verbar] Internal Revenue Service (irs.gov) at https://www.irs.gov/newsroom/tax-credits-for-paid-leave-under-the-american-rescue-plan-act-of-2021-for-leave-after-march-31-2021.
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    If an employee is unable to work or telework for reasons related to 
COVID-19 described in (1), (2), or (3) above, qualified sick leave 
wages are wages paid at the employee's regular rate of pay or, if 
higher, the Federal minimum wage or any applicable State or local 
minimum wage, up to a maximum of $511 per day and $5,110 in the 
aggregate. If an employee is unable to work or telework for reasons 
related to COVID-19 described in (4), (5), or (6) above, qualified sick 
leave wages are two-thirds of the wages paid at the employee's regular 
rate of pay or, if higher, the Federal minimum wage or any applicable 
State or local minimum wage, up to a maximum of $200 per day and $2,000 
in the aggregate.
    Under section 3132, a credit is available to eligible employers who 
pay qualified family leave wages to an employee for up to 12 weeks of 
paid family leave provided during the period beginning April 1, 2021, 
and ending September 30, 2021, if the employee is unable to work or 
telework due to any of the conditions for which eligible employers may 
provide paid sick leave. Qualified family leave wages are two-thirds of 
the wages paid at the employee's regular rate of pay, up to a maximum 
of $200 per day and $12,000 in the aggregate.
    An eligible employer may not receive the paid family leave credit 
for the same wages for which it received the paid sick leave credit. 
Further, an eligible employer that receives the credits for qualified 
sick leave wages under section 3131 of the Code and qualified family 
leave wages under section 3132 of the Code (collectively, ``qualified 
leave wages'') may not receive the employee retention credit allowed 
under section 2301 of the CARES Act or section 3134 of the Code based 
on the same wages. For the second calendar quarter of 2021, if an 
eligible employer receives the employee retention credit under section 
2301 of the CARES Act based on wages paid that are also qualified leave 
wages on which the employer may claim the paid sick and family leave 
credits, the employer must reduce any paid sick and family leave 
credits by the amount of the credit allowed under section 2301 of the 
CARES Act that is attributable to those same wages. See sections 
3131(f)(3) and 3132(f)(3). For the third and fourth calendar quarters 
of 2021, any qualified leave wages eligible employers take into account 
for purposes of the paid sick and family leave credits may not be taken 
into account for purposes of the employee retention credit under 
section 3134 of the Code. See section 3134(c)(3)(D).
    The paid sick and family leave credits are also reduced by the 
amount of the credit allowed under section 41 (the credit for 
increasing research activities) with respect to wages taken into 
account for determining both the credit under section 41 and the paid 
sick and family leave credits. In addition, any wages taken into 
account in determining paid sick and family leave credits cannot be 
taken into account as wages for purposes of the credits under sections 
45A, 45P, 45S, and 51. See sections 3131(f)(3) and 3132(f)(3).
    Sections 3131(f)(2) and 3132(f)(2) provide that, for purposes of 
sections 3131 and 3132, respectively, the term ``wages'' means wages as 
defined in section 3121(a), determined without regard to paragraphs (1) 
through (22) of section 3121(b), and compensation as defined in section 
3231(e), determined without regard to the sentence in section 
3231(e)(1) that begins ``Such term does not include remuneration''. 
Eligible employers are entitled to receive a credit equal to the amount 
of qualified leave wages paid under sections 3131 and 3132. Under 
sections 3131(d) and 3132(d), the credit is increased by the eligible 
employer's cost of maintaining health insurance coverage allocable to 
the qualified leave wages (``allocable qualified health plan 
expenses''). Under sections 3131(e) and 3132(e), the credit is also 
increased by certain amounts paid under collectively bargained 
agreements by the eligible employer that are properly allocable to the 
qualified leave wages (``certain collectively bargained 
contributions''), subject to the daily and aggregate credit 
limitations. The credits for the qualified leave wages and the 
collectively bargained contributions combined cannot exceed the $511 
daily and $5110 aggregate limitation or $200 daily and $2000 aggregate 
limitation for paid sick leave and the $200 daily and $12,000 aggregate 
limitation for paid family leave. However, the credit for the allocable 
qualified health expenses is in addition to the credit for the 
qualified leave wages and not subject to the daily and aggregate credit 
limitations.
    Under sections 3131 and 3132, qualified leave wages are subject to 
the taxes imposed on employers by sections 3111(a) (employer's share of 
social security tax), 3111(b), and 3221(a), but section 3133(a) 
provides that the paid sick and family leave credits under sections 
3131 and 3132 are increased by the amount of the taxes imposed by 
sections 3111(a), 3111(b), and 3221(a) on qualified leave wages.
    The paid sick and family leave credits under sections 3131 and 3132 
are allowed against the taxes imposed on employers under section 
3111(b) (the Hospital Insurance tax (Medicare tax)), and against so 
much of the taxes imposed under section 3221(a) (the Railroad 
Retirement Tax Act Tier 1 tax) as are attributable to the rate in 
effect under section 3111(b), as applicable, on all wages and 
compensation paid to all employees, and any credit amounts in excess of 
these taxes are treated as an overpayment to be refunded under sections 
6402(a) and 6413(b) of the Code. See sections 3131(b)(4)(A), 
3131(f)(1), 3132(b)(3)(A), and 3132(f)(1).

II. Employee Retention Credit

    Section 2301 of the CARES Act, as originally enacted, provides for 
an employee retention credit for eligible employers, including tax-
exempt organizations, that pay qualified wages, including certain 
health plan expenses, to some or all employees after March 12, 2020, 
and before January 1, 2021. Section 206 of the Relief Act adopted 
amendments and technical changes to section 2301 of the CARES Act for 
qualified wages paid after March 12, 2020, and before January 1, 2021, 
primarily expanding eligibility for certain employers to claim the 
credit. Section 206 of the Relief Act is effective retroactive to the 
effective date of section 2301 of the CARES Act. Section 207 of the 
Relief Act, which is effective

[[Page 50639]]

for calendar quarters beginning after December 31, 2020, further amends 
section 2301 of the CARES Act to extend the application of the employee 
retention credit to qualified wages paid after December 31, 2020, and 
before July 1, 2021, and to modify the calculation of the credit amount 
for qualified wages paid during that time. Section 9651 of the ARP 
enacted section 3134 of the Code, effective for calendar quarters 
beginning after June 30, 2021, to provide an employee retention credit 
for qualified wages paid after June 30, 2021, and before January 1, 
2022. The Department of the Treasury (Treasury Department) and the 
Internal Revenue Service (IRS) will continue to monitor potential 
legislation related to the employee retention credit that may impact 
certain rules described in this preamble.
    The employee retention credit is available to any employer carrying 
on a trade or business during a calendar quarter that meets the 
requirements to be an eligible employer under section 3134, which 
include experiencing a full or partial suspension of business 
operations due to orders from an appropriate governmental authority 
limiting commerce, travel, or group meetings (for commercial, social, 
religious, or other purposes) due to COVID-19, experiencing a decline 
in gross receipts, or qualifying as a recovery startup business.
    For eligible employers that averaged more than 500 full-time 
employees (within the meaning of section 4980H) during 2019 (large 
eligible employers), qualified wages are wages and compensation 
(including allocable qualified health plan expenses), up to $10,000 per 
employee per calendar quarter, paid to employees for the time during 
which they are not providing services due to a full or partial 
suspension of business operations or a decline in gross receipts. For 
eligible employers that averaged 500 full-time employees or fewer 
during 2019 (small eligible employers), and for severely financially 
distressed employers as defined in section 3134(c)(3)(C)(ii) that are 
also large eligible employers, qualified wages are the wages and 
compensation (including allocable qualified health plan expenses), up 
to $10,000 per employee per calendar quarter, paid with respect to an 
employee (regardless of whether the employee is performing services) 
during any period in the calendar quarter in which the business 
operations are fully or partially suspended due to a governmental order 
or during any calendar quarter in which the employer is experiencing a 
decline in gross receipts. If an employer was not in existence in 2019, 
an employer may use the average number of full-time employees in 2020 
rather than 2019. If an employer is an eligible employer due to being a 
recovery startup business, the maximum aggregate employee retention 
credit the employer may claim in a calendar quarter is $50,000. In the 
third and fourth calendar quarters of 2021, a recovery startup business 
that is a small eligible employer may treat all wages paid with respect 
to an employee during the quarter as qualified wages. See Notice 2021-
49.
    The same wages or compensation cannot be counted for both the paid 
sick and family leave credits under sections 3131 and 3132 and the 
employee retention credit under section 3134. Qualified wages for the 
employee retention credit also do not include any wages taken into 
account under sections 41, 45A, 45P, 45S, 51, and 1396 of the Code. See 
section 3134(c)(3)(D). Additionally, qualified wages do not include 
amounts taken into account as payroll costs for Paycheck Protection 
Program loan forgiveness and certain grants. See section 3134(h).
    Section 3134(c)(4)(A) provides that, for purposes of section 3134, 
the term ``wages'' means wages as defined in section 3121(a) \3\ and 
compensation as defined in section 3231(e).
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    \3\ For purposes of certain governmental organizations or 
entities as described in section 3134(f)(2) of the Code, wages as 
defined in section 3121(a) are determined without regard to 
paragraphs (5), (6), (7), (10), and (13) of section 3121(b) (except 
with respect to services performed in a penal institution by an 
inmate thereof).
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    The employee retention credit under section 3134 is equal to 70 
percent of qualified wages paid. The credit is allowed against the 
taxes imposed on employers under section 3111(b), first reduced by any 
tax credits allowed under sections 3131 and 3132, and against so much 
of the taxes imposed under section 3221(a) as are attributable to the 
rate in effect under section 3111(b), as applicable, first reduced by 
any credits allowed under sections 3131 and 3132, on all wages and 
compensation paid to all employees. Any credit amounts in excess of 
these taxes are treated as an overpayment that shall be refunded under 
sections 6402(a) and 6413(b) of the Code.

III. Refundability of Credits

    Sections 3131(b)(4)(A), 3132(b)(3)(A), and 3134(b)(3) provide that 
if the amount of the paid sick and family leave credits (which would 
include any increases in the credits under section 3133(a)) and 
employee retention credit exceeds the taxes imposed under section 
3111(b) and so much of the taxes imposed under section 3221(a) as are 
attributable to the rate in effect under section 3111(b), as 
applicable, for any calendar quarter, after application of the other 
credits previously applied, such excess shall be treated as an 
overpayment that shall be refunded under sections 6402(a) and 6413(b).
    Section 6402(a) generally provides that, within the applicable 
period of limitations, overpayments may be credited against any 
liability in respect of an internal revenue tax on the part of the 
person who made the overpayment and any remaining balance refunded to 
such person. Section 6413(b) provides that if more than the correct 
amount of employment tax imposed by sections 3101, 3111, 3201, 3221, or 
3402 is paid or deducted and the overpayment cannot be adjusted under 
section 6413(a).\4\ the amount of the overpayment shall be refunded 
(subject to the applicable statute of limitations) as the Secretary may 
prescribe in regulations.
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    \4\ Section 6413(a) addresses interest-free adjustments of 
overpayments. The section provides that if more than the correct 
amount of employment tax imposed by section 3101, 3111, 3201, 3221, 
or 3402 is paid with respect to any payment of remuneration, proper 
adjustments with respect to both the tax and the amount to be 
deducted, shall be made, without interest, in such manner and at 
such times as the Secretary may by regulations prescribe.
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    The IRS revised Form 941, Employer's Quarterly Federal Tax Return, 
Form 943, Employer's Annual Federal Tax Return for Agricultural 
Employees, Form 944, Employer's Annual Federal Tax Return, and Form CT-
1, Employer's Annual Railroad Retirement Tax Return, so that employers 
may use these returns to claim the paid sick and family leave credits 
under sections 3131 through 3133 and the employee retention credit 
under section 3134. The revised employment tax returns allow for any of 
these credits in excess of the taxes imposed under section 3111(b) and 
so much of the taxes imposed under section 3221(a) as are attributable 
to the rate in effect under section 3111(b), as applicable, to be 
credited against other employment taxes and then for any remaining 
balance to be credited or refunded to the employer in accordance with 
section 6402(a) or section 6413(b).

IV. Advance Payment of Credits and Erroneous Refunds

    Sections 3131(b)(4)(B) and 3132(b)(3)(B) provide that, in 
anticipation of the paid sick and family leave credits under these 
sections (which would include any increases in the credits under 
section 3133(a)), including any refundable portions, these

[[Page 50640]]

credits are to be advanced, according to forms and instructions 
provided by the Secretary, up to the total allowable amount of the 
credits and subject to applicable limits for the calendar quarter. 
Section 3134(j)(2) provides that eligible employers for which the 
average number of full-time employees (within the meaning of section 
4980H) employed by the eligible employer during 2019 was not greater 
than 500 may elect for any calendar quarter to receive an advance 
payment of the employee retention credit for the quarter in an amount 
not to exceed 70 percent of the average quarterly wages paid in 
calendar year 2019.
    To implement the advance payment provisions, employers that are 
eligible to receive an advance of the tax credits may use IRS Form 
7200, Advance Payment of Employer Credits Due To COVID-19, to request 
an advance of the paid sick and family leave credits and the employee 
retention credit. Employers are required to reconcile any advance 
payments claimed on Form 7200 with total credits claimed and total 
taxes due on their employment tax returns.
    A refund or credit of any portion of these tax credits, regardless 
of whether they are advanced, to a taxpayer in excess of the amount to 
which the taxpayer is entitled is an erroneous refund that the employer 
must repay.

V. Assessment Authority

    Section 6201 authorizes the Secretary to determine and assess tax 
liabilities including interest, additional amounts, additions to the 
tax, and assessable penalties. However, the general authority to assess 
tax liabilities under section 6201(a) does not provide for the 
assessment of any non-rebate \5\ portion of an erroneous refund of a 
refundable tax credit, which may include a portion of the credits 
available under sections 3131, 3132, and 3134, if the refund exceeds 
the amounts to which an employer is properly entitled. While these 
types of erroneous refunds are generally recovered or recaptured 
through agreed upon voluntary repayments, setoff, or through 
litigation, the Code in some instances, such as in sections 3131, 3132, 
and 3134, provides for the administrative recapture of these non-rebate 
refunds either by directly authorizing assessment of the erroneous non-
rebate refunds or by authorizing the promulgation of regulations or 
other guidance to do so.
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    \5\ As a general matter, ''non-rebate'' refers to the portion of 
any refund of a tax credit that exceeds the IRS's determination of 
the recipient's tax liability (i.e., the remaining portion of the 
refund that is paid to the recipient after the refund has been 
applied to the recipient's tax liability).
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    Specifically, with regard to the paid sick and family leave 
credits, sections 3131(g) and 3132(g) provide, in relevant part, that 
the Secretary will 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 this provision and to recapture the benefit of 
the credit in cases where there is a subsequent adjustment to the 
credit. See sections 3131(g)(1), 3131(g)(4), 3132(g)(1), and 
3132(g)(4). With regard to the employee retention credit, section 
3134(j)(3)(B) allows for the direct assessment of certain erroneous 
refunds of advanced portions of the credit by providing that if a small 
eligible employer specified in section 3134(j)(2) receives excess 
advance payments of the credit, then the taxes imposed under section 
3111(b) or so much of the taxes imposed under section 3221(a) as are 
attributable to the rate in effect under section 3111(b), as 
applicable, for the calendar quarter are increased by the amount of the 
excess. Section 3134(m)(3) further provides that the Secretary will 
issue such forms, instructions, regulations, and other guidance as are 
necessary to prevent the avoidance of the purposes of the limitations 
under section 3134.
    On July 29, 2020, temporary regulations (TD 9904) amending the 
Employment Tax Regulations under sections 3111 and 3221 to provide for 
the recapture of erroneous refunds of the paid sick and family leave 
credits under the Families First Act and erroneous refunds of the 
employee retention credit under the CARES Act, pursuant to the 
authority granted under these acts to prescribe those regulations, were 
published in the Federal Register (85 FR 45514). A notice of proposed 
rulemaking (REG-111879-20) cross-referencing the temporary regulations 
was published in the Federal Register on the same day (85 FR 45551). 
Because the ARP did not amend the Families First Act or CARES Act to 
extend the paid leave credits and employee retention credit provided 
thereunder, but rather enacted new Code sections that provide for 
similar credits, the temporary regulations in TD 9904 do not apply to 
the credits under the ARP. Therefore, separate regulations are required 
to provide for the recapture of the erroneous refund of these credits 
pursuant to the authority granted under sections 3131, 3132, and 3134.
    Accordingly, this document amends the Employment Tax Regulations 
(26 CFR part 31) by adding temporary regulations under new sections 
3131, 3132, and 3134 of the Code. Concurrent with the publication of 
this Treasury decision, the Treasury Department and the IRS are 
publishing in the Proposed Rules section of this issue of the Federal 
Register a notice of proposed rulemaking (REG-109077-21) on this 
subject that cross-references the text of these temporary regulations. 
See section 7805(e)(1). Interested persons are directed to the 
ADDRESSES and Comments and Requests for a Public Hearing sections of 
the preamble to REG-109077-21 for information on submitting public 
comments or requesting a public hearing on the proposed regulations.

Explanation of Provisions

    Sections 3131(b)(3), 3131(b)(4)(A), 3131(f)(1), 3132(b)(2), 
3132(b)(3)(A), 3132(f)(1), 3134(b)(2), 3134(b)(3), and 3134(c)(1) 
provide that the credits described in these sections are taken against 
the taxes imposed under section 3111(b) and so much of the taxes 
imposed under section 3221(a) as are attributable to the rate in effect 
under section 3111(b), as applicable, (although for the employee 
retention credit, the taxes are first reduced by any paid sick and 
family leave credits). Additionally, if the amount of the credits 
exceeds these taxes for any calendar quarter, then the excess shall be 
treated as an overpayment to be refunded or credited under sections 
6402(a) and 6413(b). 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. Section 3134(j)(3)(B) provides that if a small eligible 
employer specified in section 3134(j)(2) receives excess advance 
payments of the credit, then the taxes imposed under section 3111(b) or 
so much of the taxes imposed under section 3221(a) as are attributable 
to the rate in effect under section 3111(b), as applicable, for the 
calendar quarter are increased by the amount of the excess.
    These temporary regulations provide that erroneous refunds of these 
credits are treated as underpayments of the taxes imposed under section 
3111(b) and so much of the taxes imposed under section 3221(a) as are 
attributable to the rate in effect under section 3111(b), as 
applicable. These temporary regulations authorize the IRS to assess any 
credits erroneously credited, paid, or refunded in excess of the amount 
allowed as if those amounts were taxes imposed under section 3111(b) 
and so much of the taxes imposed under section 3221(a) as are 
attributable to the rate in effect under section 3111(b), as 
applicable,

[[Page 50641]]

subject to assessment and administrative collection procedures. This 
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 administrative 
protections afforded to taxpayers with respect to contesting their tax 
liabilities under the Code 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 
assessment and administrative collection procedures do not replace the 
existing recapture methods, but rather represent an alternative method 
available to the IRS.
    Specifically, these temporary regulations provide that any amount 
of the credits for qualified leave wages and certain collectively 
bargained contributions under sections 3131 and 3132, plus any amount 
of credits for qualified health plan expenses under sections 3131(d) 
and 3132(d), and including any increases in these credits under section 
3133, and any amount of the employee retention credit for qualified 
wages under section 3134 of the Code that are erroneously refunded or 
credited to an employer shall be treated as underpayments of the taxes 
imposed under section 3111(b) and so much of the taxes imposed under 
section 3221(a) as are attributable to the rate in effect under section 
3111(b), as applicable, by the employer and may be administratively 
assessed and collected in the same manner as the taxes. These temporary 
regulations provide that the determination of any amount of credits 
erroneously refunded must take into account any credit amounts advanced 
to an employer under the process established by the IRS in accordance 
with sections 3131(b)(4)(B), 3132(b)(3)(B) and 3134(j)(2).
    In certain situations, third-party payors claim tax credits on 
behalf of their common law employer clients. These temporary 
regulations address this situation by providing that employers against 
which an erroneous refund of credits may be assessed as an underpayment 
include persons treated as the employer under sections 3401(d), 3504, 
and 3511, consistent with their liability for the employment taxes 
against which the credits applied.
    Sections 3131(h) and 3132(h) provide that the paid sick and family 
leave credits apply to wages paid with respect to a period of leave 
taken beginning on April 1, 2021 and ending on September 30, 2021. 
Section 3134(n) provides that the employee retention tax credit applies 
to wages paid after June 30, 2021, and before January 1, 2022.
    Pursuant to section 7805(b)(2) of the Code, these temporary 
regulations are permitted to apply before the dates provided under 
section 7805(b)(1), including the date on which these temporary 
regulations are filed with the Federal Register, because these 
temporary regulations are being issued within 18 months of the date of 
the enactment of the relevant statutory provisions. Accordingly, these 
temporary regulations apply to all credits under sections 3131 and 
3132, including any increases to the credits under section 3133, 
credited or refunded on or after April 1, 2021, including advanced 
refunds, as well as all credits under section 3134 that are credited or 
refunded on or after July 1, 2021, including advanced refunds. These 
applicability dates correspond to the effective dates of the statutory 
sections that provide for these credits and that authorize guidance to 
allow for the administrative recapture of erroneous refunds of these 
credits.

Special Analyses

    The Office of Management and Budget's Office of Information and 
Regulatory Analysis has determined that these temporary regulations are 
not significant and not subject to review under section 6(b) of 
Executive Order 12866.
    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
the Secretary certifies that these temporary regulations will not have 
a significant economic impact on a substantial number of small entities 
because these temporary regulations impose no compliance burden on any 
business entities, including small entities. Although these temporary 
regulations will apply to all employers eligible for the tax credits 
under sections 3131, 3132, and 3134, including small businesses and 
tax-exempt organizations with fewer than 500 employees, and will 
therefore be likely to affect a substantial number of small entities, 
the economic impact will not be significant. These temporary 
regulations do not affect the employer's employment tax reporting or 
the necessary information to substantiate entitlement to the credits. 
Rather, these temporary regulations merely implement the statutory 
authority granted under sections 3131(g), 3132(g), and 3134(m) that 
authorize the IRS to assess, reconcile, and recapture any portion of 
the credits erroneously credited, paid, or refunded in excess of the 
actual amount allowed as if the amounts were taxes imposed under 
section 3111(b) and so much of the taxes imposed under section 3221(a) 
as are attributable to the rate in effect under section 3111(b), as 
applicable, subject to assessment and administrative collection 
procedures. Notwithstanding this certification, the Treasury Department 
and the IRS invite comments on any impact these temporary regulations 
would have on small entities.
    Pursuant to section 7805(f), these temporary 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.
    The Treasury Department and the IRS have determined that there is 
good cause to issue these regulations as temporary regulations. 
Employers were required to file Form 941, Employer's Quarterly Federal 
Tax Return, for the second quarter of calendar year 2021 by July 31, 
2021, as required by section 6071 of the Code and Treas. Reg. Sec.  
31.6071(a)-1. Employers use Form 941 to claim paid sick and family 
leave credits and the employee retention credit, as well as to report 
any advance of these credits they received during the calendar quarter. 
In filing their second quarter 2021 Form 941, some employers may have 
already received, as an advance, refund amounts in excess of the 
credits to which they are entitled. In addition to the statutory 
authority provided by section 3134(j)(3) with regard to erroneous 
advance refunds of the employee retention credit, these temporary 
regulations authorize the assessment of any erroneous refunds of the 
credits. Without these temporary regulations, in some instances the IRS 
may not be able to avoid bringing costly and burdensome litigation to 
recover the erroneous refunds. Further, comments are being solicited in 
the cross-referenced notice of proposed rulemaking that is in this 
issue of the Federal Register, and any comments will be considered 
before final regulations are issued.

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.

[[Page 50642]]

Drafting Information

    The principal author of these temporary 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 temporary regulations.

List of Subjects in 26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
retirement, Reporting and recordkeeping requirements, Social security, 
Unemployment compensation.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 31 is amended as follows:

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

0
Paragraph 1. The authority citation for part 31 is amended by adding 
entries for Sec. Sec.  31.3131-1T, 31.3132-1T, and 31.3134-1T in 
numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805.
* * * * *
    Section 31.3131-1T also issued under 26 U.S.C. 3131(g).
    Section 31.3132-1T also issued under 26 U.S.C. 3132(g).
    Section 31.3134-1T also issued under 26 U.S.C. 3134(m)(3).
* * * * *

0
Par. 2. Section 31.3131-1T is added to read as follows:


Sec.  31.3131-1T  Recapture of credits.

    (a) Recapture of erroneously refunded credits. Any amount of 
credits for qualified sick leave wages under section 3131(a), including 
any increase to the amount of the credits under sections 3131(d), 
3131(e), and 3133, that are treated as overpayments and refunded or 
credited to an employer under section 6402(a) or section 6413(b) and to 
which the employer is not entitled, resulting in an erroneous refund to 
the employer, shall be treated as an underpayment of the taxes imposed 
under section 3111(b) and so much of the taxes imposed under section 
3221(a) as are attributable to the rate in effect under section 
3111(b), as applicable, and may be assessed and collected by the 
Secretary in the same manner as the taxes.
    (b) Advance credit amounts erroneously refunded. The determination 
of any amount of credits erroneously refunded as described in paragraph 
(a) of this section must take into account any amount of credits 
advanced to an employer under the process established by the Internal 
Revenue Service in accordance with sections 3131(b)(4)(B) and 
3131(g)(6).
    (c) Third party payors. For purposes of this section, employers 
against whom an erroneous refund of the credits under section 3131 
(including any increases in those credits under section 3133), can be 
assessed as an underpayment of the taxes imposed under section 3111(b) 
and so much of the taxes imposed under section 3221(a) as are 
attributable to the rate in effect under section 3111(b), as 
applicable, include persons treated as the employer under sections 
3401(d), 3504, and 3511, consistent with their liability for the 
section 3111(b) or 3121(a) taxes against which the credit applied.
    (d) Applicability date. This section applies to all credit refunds 
under section 3131 (including any increases in those credits under 
section 3133), advanced or paid on or after April 1, 2021.

0
Par. 3. Section 31.3132-1T is added to read as follows:


Sec.  31.3132-1T  Recapture of credits.

    (a) Recapture of erroneously refunded credits. Any amount of 
credits for qualified family leave wages under sections 3132, including 
any increase to the amount of the credits under sections 3132(d), 
3132(e), and 3133, that are treated as overpayments and refunded or 
credited to an employer under section 6402(a) or section 6413(b) and to 
which the employer is not entitled, resulting in an erroneous refund to 
the employer, shall be treated as an underpayment of the taxes imposed 
under section 3111(b) and so much of the taxes imposed under section 
3221(a) as are attributable to the rate in effect under section 
3111(b), as applicable, and may be assessed and collected by the 
Secretary in the same manner as the taxes.
    (b) Advance credit amounts erroneously refunded. The determination 
of any amount of credits erroneously refunded as described in paragraph 
(a) of this section must take into account any amount of credits 
advanced to an employer under the process established by the Internal 
Revenue Service in accordance with sections 3132(b)(3)(B) and 
3132(g)(6).
    (c) Third party payors. For purposes of this section, employers 
against whom an erroneous refund of the credits under section 3132 
(including any increases in those credits under section 3133), can be 
assessed as an underpayment of the taxes imposed under section 3111(b) 
and so much of the taxes imposed under section 3121(a) as are 
attributable to the rate in effect under section 3111(b), as 
applicable, include persons treated as the employer under sections 
3401(d), 3504, and 3511, consistent with their liability for the 
section 3111(b) or 3121(a) taxes against which the credit applied.
    (d) Applicability date. This section applies to all credit refunds 
under section 3132 (including any increases in those credits under 
section 3133) advanced or paid on or after April 1, 2021.

0
Par. 4. Section 31.3134-1T is added to read as follows:


Sec.  31.3134-1T  Recapture of credits.

    (a) Recapture of erroneously refunded credits. Any amount of 
credits for qualified wages under section 3134 of the Code that is 
treated as an overpayment and refunded or credited to an employer under 
section 6402(a) or section 6413(b) of the Code and to which the 
employer is not entitled, resulting in an erroneous refund to the 
employer, shall be treated as an underpayment of the taxes imposed 
under section 3111(b) and so much of the taxes imposed under section 
3221(a) as are attributable to the rate in effect under section 
3111(b), as applicable, and may be assessed and collected by the 
Secretary in the same manner as the taxes.
    (b) Advance credit amounts erroneously refunded. The determination 
of any amount of credits erroneously refunded as described in paragraph 
(a) of this section must take into account any amount of credits 
advanced to an employer under the process established by the Internal 
Revenue Service in accordance with sections 3134(j) and 3134(m).
    (c) Third party payors. For purposes of this section, employers 
against whom an erroneous refund of the credits under section 3134 can 
be assessed as an underpayment of the taxes imposed under section 
3111(b) and so much of the taxes imposed under section 3121(a) as are 
attributable to the rate in effect under section 3111(b), as 
applicable, include persons treated as the employer under sections 
3401(d), 3504, and 3511, consistent with their liability for the 
section 3111(b) or 3121(a) taxes against which the credit applied.
    (d) Applicability date. This section applies to all credit refunds 
under

[[Page 50643]]

section 3134 advanced or paid on or after July 1, 2021.

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
    Approved: August 18, 2021.
Mark J. Mazur,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2021-19524 Filed 9-8-21; 4:15 pm]
BILLING CODE 4830-01-P