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Regs Detail Recapture of Erroneous Coronavirus Credit Refunds

Posted on July 27, 2020

The government issued temporary and proposed regulations on the recapture of erroneous refunds of credits provided in recent coronavirus legislation.

The proposed regulations (REG-111879-20) and temporary regulations (T.D. 9904) released July 24 provide that erroneous refunds of the credits provided in the Families First Coronavirus Response Act (P.L. 116-127) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) are treated as underpayments of taxes in some cases.

The Families First Act requires employers in some contexts to provide paid leave for employees affected by COVID-19, along with paid family and medical leave if other criteria are met. Employers subject to the paid leave requirements can obtain fully refundable tax credits to cover the costs of the employee leave pay, and eligible employers can qualify for a refundable credit equal to the qualified sick leave wages and qualified family leave wages, plus some health plan expenses. 

The credit is allowed against some employment tax obligations. 

The CARES Act created the employee retention tax credit, which is fully refundable and applied against the employer’s portion of payroll taxes. Only $10,000 of wages per employee can be counted for all calendar quarters, and the credit is capped at $5,000 per employee.

The CARES Act also allowed for the advance of the credits available to employers under the coronavirus legislation, so the IRS created Form 7200, “Advance Payment of Employer Credits Due to COVID-19.” Employers must reconcile advance payments claimed on Form 7200 with the total credits claimed and the taxes due on their employment tax returns, the government noted in the temporary regs. 

“A refund, a credit, or an advance of any portion of these credits to a taxpayer in excess of the amount to which the taxpayer is entitled is an erroneous refund for which the IRS must seek repayment,” the temporary regs note. 

Under section 6201, the IRS generally has the authority to determine and assess tax liabilities, interest, and penalties, but it doesn’t provide for the assessment of any non-rebate portion of an erroneous refund of a credit. Those amounts are instead recovered or recaptured through voluntary payment or litigation, according to the temporary regs. 

“However, the statutory language of the Families First Act and the CARES Act provides for the administrative recapture of these non-rebate refunds by authorizing the promulgation of regulations or other guidance to do so,” the temporary regs say.

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