The IRS has provided some penalty relief regarding the retroactive early termination of the employee retention credit provided in infrastructure legislation.
IRS Notice 2021-65, 2021-51 IRB 1, released December 6, provides guidance for employers that received advance payments of the ERC or reduced employment tax deposits in anticipation of receiving the credit for the fourth quarter of 2021, before the retroactive early end of the ERC enacted in the Infrastructure Investment and Jobs Act (P.L. 117-58)
The bill, signed into law November 15, eliminated the ERC for the fourth quarter of 2021 for all businesses except recovery start-ups, changing the end date of the credit from December 31 to September 30.
The notice explains that employers that received advance fourth-quarter ERC payments will avoid failure-to-pay penalties if they repay the erroneous amounts by the due date of their applicable tax returns.
Penalties will also be waived for employers that reduced their fourth-quarter employment tax deposits before December 21 if the amounts originally withheld are deposited by December 31, the tax liability resulting from the termination of the ERC is reported on the appropriate tax return, and the reduced deposits were in accordance with the rules in Notice 2021-24, 2021-18 IRB 1122.
The IRS noted that if an employer doesn’t qualify for relief under the notice, they can reply to a penalty notice with an explanation and the agency will consider section 6656 “reasonable cause relief.”
The ERC has allowed employers to claim a tax credit for wages paid to employees during the COVID-19 pandemic. The credit was enacted in the Coronavirus Aid, Relief, and Economic Security Act and was originally available through the end of 2020. It was extended through 2021 in subsequent legislation.
The guidance is already facing the same criticism from the nonprofit community that arose when the credit’s early termination was established.
“Notice 2021-65 provides very narrow accounting relief for charitable nonprofit employers suffering major staffing challenges because they cannot raise prices or reimbursement rates needed to increase salaries," David L. Thompson of the National Council of Nonprofits told Tax Notes, adding that the credit “was a lifeline for nonprofit employers and employees; it must be restored and extended.”
Thompson said that while the guidance may be as good as the IRS thought it could provide under the law, it isn’t good enough.
“Not for the thousands of employers that were hiring workers in reliance on this important tax incentive, and certainly not for the tens of thousands of workers who may lose their jobs because of the repeal of the employment tax credit,” Thompson said.
Before the Senate passed the infrastructure bill, the National Council of Nonprofits and the Nonprofit Association of Oregon sent a letter to Senate Finance Committee Chair Ron Wyden, D-Ore., highlighting how important the ERC has been in helping nonprofits survive the continued effects of the pandemic and requesting an extension and adjustment of the credit to help charitable organizations be included in reconciliation legislation.