On July 24, 2020, the IRS released Proposed (REG-111879-20, RIN 1545-BP88) and Temporary (TD 9904, RIN 1545-BP89) treasury regulations on the Employee Retention Credit of the CARES Act and the related medical and family leave credits of the FFCRA. These regulations formally authorize the IRS to assess, reconcile, and recapture any credits that were erroneously credited, paid, or refunded using the existing payroll tax provisions. The effective date of the regulations is July 29, 2020.
The Employee Retention Credit is a tax credit created with the March 27, 2020 enactment of the CARES Act. The basic purpose is to give employers a refundable tax credit that equals 50% of the qualified wages they pay to employees after March 12, 2020, and before Jan. 1, 2021. The maximum wage amount that can be included is capped at $10,000 per employee, which makes the claimable credit maximum $5,000 per employee. Please see our previous coverage for more information. The FFCRA contains a few different kinds of paid family leave and sick pay, generally creating two broad categories of credits available to employers. This can result in up to 80 hours of paid sick leave credits, and up to 10 weeks of paid family leave credits with varying daily caps. Please see our previous coverage for more information.
The type of recapture that the IRS is referring to in these regulations, is a recapture of any credits or benefits that were paid or granted to the taxpayer in excess of what they could properly claim. This excess could generally be created by an erroneous claim amount as part of an advanced employee retention or FFCRA credit claim on Form 7200, a reduction in payroll deposits in anticipation of an employee retention or FFCRA credit, or a refund resulting from an employee retention or FFCRA credit claim on payroll tax Form 941.
The key takeaway of these new regulations is that the IRS will act as if the above credit amounts are tax liabilities under the existing employment tax statutes if they become subject to assessment, reconciliation, or recapture. This will theoretically give the IRS the ability to assess penalties and use the same administrative collection procedures described under sections 3111(a), 3221(a), and the related provisions.