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ARPA Employment Credits Fair Game for IRS Recapture

Posted on Sep. 9, 2021

Excess employer tax credits provided under coronavirus pandemic response legislation are now eligible for IRS recapture.

Temporary regulations (T.D. 9953) issued September 8 authorize the IRS to assess erroneous refunds of paid sick leave, paid family leave, and employee retention credits paid to employers under provisions of the American Rescue Plan Act of 2021 (P.L. 117-2). The temporary regulations also serve as the language for proposed regulations (REG-109077-21).

The temporary regulations say that the erroneous refunds of the employment credits will be treated as underpayments of taxes, and that the assessments will follow the normal collection procedures for employment tax returns that include advances that exceed claimed credits.

Eligible employers can receive advance payment of the employment tax credits and are required to reconcile those payments with the actual credits claimed and total taxes due. The regulations explain that overpayments resulting from either advance payments or regular refunds will be treated as erroneous refunds of the employment credits.

Under ARPA, employers with fewer than 500 employees can claim tax credits for paid leave wages if they provide paid sick or family leave to employees unable to work because of issues related to COVID-19. The ARPA paid leave credits follow the employer eligibility requirements originally established in the Families First Coronavirus Response Act, under which employers were required to provide the COVID-19-related leave.

Employers can claim the ERC under ARPA through the end of 2021. That credit was originally implemented in the Coronavirus Aid, Relief, and Economic Security Act and allows employers to claim qualified wages paid to employees, including some health insurance costs.

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