[Federal Register Volume 88, Number 142 (Wednesday, July 26, 2023)]
[Rules and Regulations]
[Pages 48118-48125]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15690]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 31

[TD 9978]
RIN 1545-BQ08


Recapture of Certain Excess Employment Tax Credits Under COVID-19 
Legislation

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document sets forth the final regulations under sections 
3111, 3131, 3132, 3134, and 3221 of the Internal Revenue Code (Code) 
issued under the authority granted by the Families First Coronavirus 
Response Act, the Coronavirus Aid, Relief, and Economic Security Act, 
and the American Rescue Plan Act of 2021. These final regulations 
authorize the assessment of any erroneous refund of the tax credits 
paid under sections 7001 and 7003 of the Families First Coronavirus 
Response Act (including any increases in those credits under section 
7005 thereof), and section 2301 of the Coronavirus Aid, Relief, and 
Economic Security Act, as well as under sections 3131, 3132 (including 
any increases in those credits under section 3133), and 3134 of the 
Code.

DATES: 
    Effective date: These final regulations are effective on July 24, 
2023.
    Applicability date: For date of applicability, see Sec. Sec.  
31.3111-6(e), 31.3131-1(d), 31.3132-1(d), 31.3134-1(d), and 31.3221-
5(e).

FOR FURTHER INFORMATION CONTACT: NaLee Park at 202-317-6798 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document sets forth amendments to the Employment Tax 
Regulations (26 CFR part 31) under sections 3111, 3131, 3132, 3133, 
3134, and 3221.
    The Families First Coronavirus Response Act (Families First Act), 
Public Law 116-127, 134 Stat. 178 (March 18, 2020), as amended and 
extended by 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), and the Coronavirus Aid, Relief, and Economic Security Act 
(CARES Act), Public Law 116-136, 134 Stat. 281 (March 27, 2020), as 
amended and extended by the Taxpayer Certainty and Disaster Tax Relief 
Act of 2020 (Relief Act), enacted as Division EE of the Consolidated 
Appropriations Act, 2021, provided relief to taxpayers from economic 
hardships resulting from the Coronavirus Disease 2019 (COVID-19), 
including paid sick and family leave credits to eligible employers with 
respect to qualified leave wages paid for a period of leave taken 
beginning April 1, 2020, and ending March 31, 2021, and an employee 
retention credit (ERC) with respect to qualified wages paid after March 
12, 2020, and before July 1, 2021, respectively. The American Rescue 
Plan Act of 2021 (ARP), Public Law 117-2, 135 Stat. 4 (March 11, 2021), 
provided additional COVID-19 relief with similar paid leave credits 
under sections 3131 through 3133 of the Code, enacted by section 9641 
of the ARP, with respect to qualified leave wages paid for a period of 
leave taken beginning April 1, 2021, and ending September 30, 2021, and 
a substantially similar ERC under section 3134 of the Code, enacted by 
section 9651 of the ARP, with respect to qualified wages paid after 
June 30, 2021, and before January 1, 2022.\1\
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    \1\ Section 80604 of the Infrastructure Investment and Jobs Act 
(Infrastructure Act), Public Law 117-68, 135 Stat. 429 (November 15, 
2021) amended section 3134(n) of the Code to provide that the ERC 
under section 3134 applies only to wages paid after June 30, 2021, 
and before October 1, 2021 (or, in the case of wages paid by an 
eligible employer which is a recovery startup business, January 1, 
2022). Therefore, the only type of employer eligible for the ERC for 
wages paid after September 30, 2021, and before January 1, 2022, is 
an employer that meets the definition of a recovery startup business 
under section 3134(c)(5). See Notice 2021-65, 2021-51 IRB 880, for 
guidance for employers that received an advance payment of the ERC 
or reduced tax deposits in anticipation of the credit for the fourth 
quarter of 2021 prior to the amendments made by the Infrastructure 
Act.

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[[Page 48119]]

I. Paid Sick and Family Leave Credits \2\
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    \2\ Detailed information on the paid sick leave credits and paid 
family leave credits under the Families First Act, as amended by the 
Tax Relief Act, and under the ARP is provided in TD 9904, 85 FR 
45514, and TD 9953, 86 FR 50637, respectively. Also see the IRS.gov 
website at: Coronavirus Tax Relief for Businesses and Tax-Exempt 
Entities  Internal Revenue Service (irs.gov).
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A. Families First Act, as Amended and Extended by the Tax Relief Act

    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 certain 
employers with fewer than 500 employees to provide up to 80 hours of 
paid sick leave for the care of the employees themselves or for others 
for certain COVID-related reasons specified in the statute, at 
specified daily and aggregate rates of pay, and up to 10 weeks of paid 
family and medical leave at two-thirds the employee's regular rate of 
pay, up to $200 per day and $10,000 in the aggregate if the employee 
was unable to work or telework because the employee was caring for a 
son or daughter whose school or place of care was closed or whose child 
care provider was unavailable due to certain circumstances related to 
COVID-19.
    Sections 7001 and 7003 of the Families First Act generally provide 
that non-governmental employers subject to the paid leave requirements 
under EPSLA and EFMLEA are entitled to fully refundable tax credits to 
cover the wages paid for leave taken for those periods of time between 
April 1, 2020, and December 31, 2020, during which employees were 
unable to work or telework for specified reasons related to COVID-19, 
plus allocable qualified health plan expenses. These paid sick leave 
credits and paid family leave credits (collectively, paid sick and 
family leave credits) are allowed against the taxes imposed on 
employers by section 3111(a) of the Code (the Old-Age, Survivors, and 
Disability Insurance tax (social security tax)), first reduced by any 
credits claimed under section 3111(e) and (f), and section 3221(a) (the 
Railroad Retirement Tax Act Tier 1 tax), on all wages and compensation 
paid to all employees. Under section 7005 of the Families First Act, 
the qualified leave wages for which the credits are claimed are not 
subject to the taxes imposed on employers by sections 3111(a) and 
3221(a) of the Code. In addition, section 7005 provides that the 
credits under sections 7001 and 7003 of the Families First Act are 
increased by the amount of the tax imposed by section 3111(b) of the 
Code (employer's share of the Hospital Insurance tax (Medicare tax)) on 
qualified leave wages.\3\
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    \3\ The credit for the employer's share of Medicare tax does not 
apply to eligible employers that are subject to the Railroad 
Retirement Tax Act (RRTA) because under section 7005(a) of the 
Families First Act, qualified leave wages are not subject to 
Medicare tax under RRTA due to that section's reference to section 
3221(a) of the Code, that refers to both social security tax and 
Medicare tax.
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    Although the requirement to provide employees with paid leave under 
EPSLA and EFMLEA expired on December 31, 2020, the paid sick and family 
leave credits were extended by the Tax Relief Act for qualified leave 
wages paid for periods of leave taken through March 31, 2021, that 
would have satisfied the requirements of EPSLA and EFMLEA.

B. ARP

    The ARP added sections 3131 through 3133 of the Code, which provide 
refundable paid sick and family leave credits similar to those provided 
under the Families First Act. Sections 3131 through 3133 extend the 
paid sick and family leave credits to non-governmental employers with 
fewer than 500 employees and certain governmental entities \4\ without 
regard to the number of employees that provided 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 and family leave credits under sections 3131 through 3133 are 
available to eligible employers that provided 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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    \4\ Section 9641 of the ARP added sections 3131(f)(5) and 
3132(f)(5) to the Code that extends 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).
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    Under section 3131, a credit is available to eligible employers 
that paid qualified sick leave wages to an employee for up to 80 hours 
of leave provided during the period beginning April 1, 2021, and ending 
September 30, 2021, if the employee was unable to work or telework due 
to any of the COVID-related reasons specified in the statute. Under 
section 3132, a credit is available to eligible employers that paid 
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 was unable to work or 
telework due to any of the conditions for which eligible employers may 
provide COVID-related 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.
    The paid sick and family leave credits under sections 3131 and 3132 
are allowed against the taxes imposed on employers under section 
3111(b) 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, 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). See 
sections 3131(b)(4)(A), 3131(f)(1), 3132(b)(3)(A), and 3132(f)(1).

II. Employee Retention Credit \5\
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    \5\ Detailed information about the ERC under the CARES Act, as 
amended by the Relief Act, and under the ARP is provided in TD 9904 
and TD 9953, respectively. For more information, see Notice 2021-20, 
2021-11 IRB 922, Notice 2021-23, 2021-16 IRB 1113, Notice 2021-24, 
2021-18 IRB 1122, Notice 2021-49, 2021-34 IRB 316, and Rev. Proc. 
2021-33, 2021-34 IRB 327. Also see the IRS.gov website at: 
Coronavirus Tax Relief for Businesses and Tax-Exempt Entities/
Internal Revenue Service (irs.gov).
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A. CARES, as Amended and Extended by the Relief Act

    Section 2301 of the CARES Act, as originally enacted, provides for 
the ERC for eligible employers, including tax-exempt organizations, 
that paid qualified wages, including certain health plan expenses, to 
some or all of their employees after March 12, 2020, and before January 
1, 2021. The ERC, as originally enacted, is a fully refundable tax 
credit for employers equal to 50 percent of qualified wages. Section 
2301(b)(1) of the CARES Act limits the amount of qualified wages with 
respect to any employee that may be taken into account to $10,000 for 
all calendar quarters in 2020. Therefore, the maximum credit amount 
with respect to each employee for all four calendar quarters in 2020 is 
$5,000. For employers that averaged more than 100 full-time employees 
during 2019, qualified wages are wages and compensation (including 
allocable qualified health plan expenses) paid to employees who were 
not providing

[[Page 48120]]

services because operations were fully or partially suspended 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 or due to a significant decline in gross 
receipts. For employers that averaged 100 full-time employees or fewer 
during 2019, qualified wages are wages and compensation (including 
allocable qualified health plan expenses) paid to any employee during 
the period operations were fully or partially suspended 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 or due to a significant decline in gross 
receipts, regardless of whether their employees were providing 
services.
    The ERC available under section 2301 of the CARES Act for a 
calendar quarter is allowed against the taxes imposed on employers by 
section 3111(a) of the Code, first reduced by any credits allowed under 
section 3111(e) and (f) and sections 7001 and 7003 of the Families 
First Act, and the taxes imposed under section 3221(a) of the Code that 
are attributable to the rate in effect under section 3111(a), first 
reduced by any credits allowed under sections 7001 and 7003 of the 
Families First Act, on the wages and compensation paid with respect to 
the employment of all the employees of the eligible employer for that 
calendar quarter.
    Section 2301 of the CARES Act was subsequently amended by sections 
206 and 207 of the Relief Act. Section 206 of the Relief Act adopted 
retroactive 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 207 of the Relief Act further amended 
section 2301 of the CARES Act to extend the application of the ERC to 
qualified wages paid after December 31, 2020, and before July 1, 2021, 
to modify the gross receipts test for calendar quarters in 2021, and to 
modify the calculation of the credit amount for qualified wages paid 
during that time. Under section 2301 of the CARES Act, as amended by 
section 207 of the Relief Act, the ERC is equal to 70 percent of 
qualified wages. The Relief Act also increased the amount of qualified 
wages that could be taken into account per employee to $10,000 per 
employee per calendar quarter in 2021. Therefore, the maximum credit 
amount with respect to each employee for any calendar quarter in 2021 
is $7,000. Additionally, the threshold distinguishing small employers 
from large employers for purposes of applying certain criteria to 
determine eligibility for the credit was increased from 100 employees 
to 500 employees.

B. ARP and Infrastructure Act

    Section 9651 of the ARP enacted section 3134 of the Code, effective 
for calendar quarters beginning after June 30, 2021, to provide an ERC 
for qualified wages paid after June 30, 2021, and before January 1, 
2022. The ERC under section 3134 is substantially similar to the ERC 
under section 2301 of the CARES Act, though the ARP made some 
modifications including expanding the definition of eligible employer 
and the definition of qualified wages.\6\ Additionally, the ERC 
available under section 3134 of the Code for a calendar quarter is 
allowed against the taxes imposed on employers under section 3111(b), 
first reduced by any credits allowed under sections 3131 and 3132, and 
the taxes imposed under section 3221(a) that are attributable to the 
rate in effect under section 3111(b), first reduced by any credits 
allowed under sections 3131 and 3132, on the wages and compensation 
paid with respect to the employment of all the employees of the 
eligible employer for that calendar quarter. Any credit amounts in 
excess of these taxes are treated as an overpayment to be refunded 
under sections 6402(a) and 6413(b). See section 3134(b)(3), 3134(c)(1).
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    \6\ For more information on the changes made to the ERC when 
section 3134 was added to the Code, see Notice 2021-49.
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    The ERC is available to any employer that carried on a trade or 
business during a calendar quarter between June 30, 2021, and January 
1, 2022, that met the requirements to be an eligible employer under 
section 3134(c)(2), 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. See Notice 2021-49. Section 80604 of the 
Infrastructure Act amended section 3134(n) to provide that the ERC 
applies only to wages paid after June 30, 2021, and before October 1, 
2021 (or, in the case of wages paid by an eligible employer that was a 
recovery startup business in the fourth quarter of 2021, January 1, 
2022).\7\
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    \7\ Employers that qualify because they are recovery startup 
businesses may claim the ERC for wages paid after September 30, 
2021, and before January 1, 2022. For more information, see Notice 
2021-65 for amendments made by the Infrastructure Act. Notice 2021-
65 explains the retroactive termination of the ERC and provides 
instructions for employers that became ineligible and must repay any 
advance payment of ERC or seek to avoid failure to deposit penalties 
for the fourth quarter of 2021.
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III. Refundability of Credits

    Sections 7001(b)(4) and 7003(b)(3) of the Families First Act 
provide that if the amount of the paid sick and family leave credits 
under these sections (including any increases in the credits under 
section 7005) for the period of leave taken from April 1, 2020 through 
March 31, 2021, exceeds the taxes imposed by section 3111(a) of the 
Code, first reduced by any credits claimed under section 3111(e) and 
(f), or section 3221(a) for any calendar quarter, the excess shall be 
treated as an overpayment that shall be refunded under sections 6402(a) 
and 6413(b). For the period after March 12, 2020, and before July 1, 
2021, section 2301(b)(3) of the CARES Act provides that if the amount 
of the ERC exceeds the applicable employment taxes \8\ (first reduced 
by any credits allowed under section 3111(e) and (f) of the Code, 
sections 7001 and 7003 of the Families First Act, and section 303(d) of 
the Relief Act), the excess shall be treated as an overpayment that 
shall be refunded under sections 6402(a) and 6413(b) of the Code.
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    \8\ ``Applicable employment taxes'' are defined in section 
2301(c)(1) of the CARES Act as the taxes imposed by section 3111(a) 
of the Code or so much of the taxes imposed under section 3221(a) of 
the Code as are attributable to the rate in effect under section 
3111(a) of the Code.
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    With respect to the paid sick and family leave credits and ERC 
enacted by the ARP, sections 3131(b)(4)(A), 3132(b)(3)(A), and 
3134(b)(3) of the Code provide that if the amount of the paid sick and 
family leave credits under these sections (including any increases in 
the credits under section 3133(a)) and ERC 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, the 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

[[Page 48121]]

of an Internal Revenue tax on the part of the person who made the 
overpayment, and any remaining balance refunded to that 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),\9\ 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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    \9\ 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 the manner and at the 
times as the Secretary may prescribe in regulations.
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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, several times in 
calendar years 2020 through 2022 so that employers could use these 
returns to claim the paid sick and family leave credits under the 
Families First Act and under sections 3131 through 3133 of the Code and 
the ERC under the CARES Act and under section 3134 of the Code 
(collectively, COVID-19 credits). The revised employment tax returns 
allowed for any of these credits in excess of the taxes imposed under 
section 3111(a) or 3111(b), as applicable, and so much of the taxes 
imposed under section 3221(a) as are attributable to the rate in effect 
under section 3111(a) or 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). Form 941-X, Adjusted Employer's Quarterly Federal 
Tax Return or Claim for Refund, Form 943-X, Adjusted Employer's Annual 
Federal Tax Return for Agricultural Employees or Claim for Refund, Form 
944, Adjusted Employer's Annual Federal Tax Return or Claim for Refund, 
and Form CT-1 X, Adjusted Employer's Annual Railroad Retirement Tax 
Return or Claim for Refund were also revised so that employers can use 
these returns to amend previous employment tax returns to adjust or 
claim COVID-19 credits for prior periods.

IV. Advance Payment of Credits and Erroneous Refunds

    Section 3606 of the CARES Act amended sections 7001(b)(4) and 
7003(b)(3) of the Families First Act to provide that, in anticipation 
of the paid sick and family leave credits under these sections, 
including any refundable portions (including any increases in the 
credits under section 7005), these credits may be advanced, according 
to forms and instructions provided by the Secretary, up to the total 
allowable amount and subject to applicable limits for the calendar 
quarter. Section 2301(l)(1) of the CARES Act provides that the 
Secretary shall issue such forms, instructions, regulations, and 
guidance as are necessary to allow the advance payment of the ERC under 
section 2301, subject to the limitations provided in section 2301 and 
based on such information as the Secretary shall require. Section 
2301(j)(2)(A) of the CARES Act, as amended by section 207(g)(1) of the 
Relief Act, provides that, under rules provided by the Secretary, 
eligible employers for which the average number of full-time employees 
(within the meaning of section 4980H of the Code) employed by the 
eligible employer during 2019 was not greater than 500 may elect, for 
calendar quarters in 2021, to receive an advance payment of the ERC for 
the quarter in an amount not to exceed 70 percent of the average 
quarterly wages paid in calendar year 2019.
    Similarly, 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 (including any increases in the credits under section 3133(a)) 
and any refundable portions, these 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)(A) provides that, 
under rules provided by the Secretary, 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 calendar quarters in 2021, to receive an 
advance payment of the ERC 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 were 
eligible to receive an advance of the tax credits used IRS Form 7200, 
Advance Payment of Employer Credits Due To COVID-19, to request an 
advance of the COVID-19 credits.\10\ Employers were required to 
reconcile any advance payments claimed on Form 7200 with total credits 
claimed and total taxes due on their employment tax returns, including 
amended tax returns.
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    \10\ Employers are no longer able to request an advance payment 
of any credit on Form 7200. The advance payment of COVID-19 credits 
ended on January 31, 2022.
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    A refund or credit of any portion of the COVID-19 credits, 
regardless of whether they were advanced, claimed by 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 and requires the Secretary to determine and 
assess tax liabilities, including interest, additional amounts, 
additions to the tax, and assessable penalties. The Code or other 
statutory authority provides for the administrative recapture of 
certain erroneous refunds of the COVID-19 credits either by directly 
authorizing the assessment of the erroneous refunds or by authorizing 
the promulgation of regulations or other guidance to do so.
    Specifically, with regard to paid sick and family leave credits, 
sections 7001(f) and 7003(f) of the Families First Act and sections 
3131(g) and 3132(g) of the Code 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 these provisions and to recapture the benefit 
of the credit where there is a subsequent adjustment to the credit. See 
sections 7001(f) and 7003(f) of the Families First Act, and sections 
3131(g)(1), 3131(g)(4), 3132(g)(1), and 3132(g)(4) of the Code.
    With regard to the ERC, section 2301(l) of the CARES Act provides 
in relevant part that the Secretary shall issue such forms, 
instructions, regulations, and guidance as are necessary to reconcile 
an advance payment of the ERC with the amount determined at the time of 
filing the employment tax return for the applicable calendar quarter or 
taxable year. Section 2301(j)(3)(B) of the CARES Act, as amended by 
section 207 of the Relief Act, allows for the direct assessment of 
certain erroneous refunds of advanced portions of the ERC by providing 
that if a small eligible employer specified in section 2301(j)(2) of 
the CARES Act receives excess

[[Page 48122]]

advance payments of the credit, then the taxes imposed by chapter 21 or 
22 of the Code (whichever is applicable) for the calendar quarter are 
increased by the amount of the excess. Section 2301(l) of the CARES Act 
generally, as amended by sections 206 and 207 of the Relief Act, 
further provides that the Secretary shall issue such forms, 
instructions, regulations, and other guidance as are necessary to 
prevent the avoidance of the purposes of the limitations under section 
2301 of the CARES Act. Correspondingly, section 3134(j)(3)(B) of the 
Code 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.

VI. Temporary Regulations

    On July 29, 2020, temporary regulations (TD 9904, 2020-34 IRB 413 
(August 17, 2020)) 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 ERC 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). The text of the temporary regulations served as the 
text of the proposed regulations. No public hearing was requested or 
held. Two comments responding to the notice of proposed rulemaking were 
received. All comments were considered and are available for public 
inspection and copying at https://www.regulations.gov or upon request. 
After consideration of the comments, the proposed regulations are 
adopted by this Treasury decision with a minor modification, and the 
corresponding temporary regulations are removed. The public comments 
are discussed under ``Summary of Comments and Explanation of 
Provisions.''
    On September 10, 2021, temporary regulations (TD 9953, 2021-39 IRB 
430 (September 27, 2021)) amending the Employment Tax Regulations under 
sections 3131 through 3134 to provide for the recapture of erroneous 
refunds of the paid sick and family leave credits and ERC under the 
ARP, pursuant to the authority granted under that act to prescribe 
those regulations, were published in the Federal Register (86 FR 
50637). A notice of proposed rulemaking (REG-109077-21) cross-
referencing the temporary regulations was published in the Federal 
Register on the same day (86 FR 50687). The text of the temporary 
regulations served as the text of the proposed regulations. No public 
hearing was requested or held, and no comments were received on the 
proposed regulations. The proposed regulations are adopted by this 
Treasury decision with a minor modification, and the corresponding 
temporary regulations are removed.
    Accordingly, this document amends the Employment Tax Regulations 
(26 CFR part 31) by finalizing the regulations under sections 3111, 
3131, 3132, 3134, and 3221 of the Code.

Summary of Comments and Explanation of Revisions

    The Department of the Treasury (Treasury Department) and the IRS 
received two comments in response to the proposed regulations under 
sections 3111 and 3221 but no comments in response to the proposed 
regulations under sections 3131 through 3134. Neither comment received 
addressed the assessment and recapture of erroneous refunds of credits 
under the Families First Act and the CARES Act. One commenter said that 
the CARES Act should not fund businesses that primarily or exclusively 
employ non-citizen and temporary visa workers. The second commenter 
requested that the Treasury Department and the IRS consider providing 
additional guidance on potential reporting issues, including for 
certain retirement-related provisions in the CARES Act. These issues 
are outside the scope of these regulations. For this reason, these 
final regulations do not address these comments and adopt the proposed 
regulations with a minor modification. The corresponding temporary 
regulations are removed.
    These final regulations provide that erroneous refunds of COVID-19 
credits are treated as underpayments of the taxes imposed under section 
3111(a) or 3111(b), as applicable, and so much of the taxes imposed 
under section 3221(a) as are attributable to the rate in effect under 
section 3111(a) or 3111(b), as applicable, and are, therefore, 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 both in the processing of employment tax returns and in 
examining returns for excess claimed credits. These assessment and 
administrative collection procedures are not intended to be exclusive 
and therefore do not replace the existing recapture methods but rather 
represent an alternative method available to the IRS. These final 
regulations also 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 7001(b)(4)(A)(ii) and 7003(b)(3)(B) of the 
Families First Act, as modified by section 3606 of the CARES Act, and 
section 2301(l)(1) of the CARES Act.
    In certain circumstances, third-party payors claim tax credits on 
behalf of their common law employer clients. These final regulations 
clarify 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. In 
addition, these final regulations clarify the proposed regulations by 
expressly stating that the common law employer clients of these third-
party payors that remain subject to all provisions of law applicable to 
employers with respect to the payment of wages or compensation, as 
applicable, may also be assessed for an erroneous refund of credits. 
This clarification makes clear to employers what had been implicit in 
the proposed regulations, that the existing rules in sections 3504 and 
3511(c) concerning the liability of common law employer clients of 
third-party payors remain applicable in this situation. Specifically, 
section 3504 provides that where a fiduciary, agent, or other person is 
acting for an employer in performing acts required of the employer 
under the Code, ``the employer for whom such

[[Page 48123]]

fiduciary, agent, or other person acts shall remain subject to the 
provisions of law (including penalties) applicable in respect of 
employers.'' See also Sec. Sec.  31.3504-1(a) and 31.3504-2(c)(2). 
Similarly, section 3511(c) and Sec.  31.3511-1(a)(3) provide that, for 
third-party payors that are Certified Professional Employer 
Organizations (CPEO), an employer client of a CPEO is treated as an 
employer (and therefore subject to all applicable provisions of law) 
for purposes of Federal employment taxes imposed on remuneration paid 
by the CPEO to non-worksite employees.\11\ While sections 3504 and 3511 
applied in the same manner as a matter of law under the proposed 
regulations, the final regulations expressly state these rules to avoid 
any confusion and help employers better understand their legal 
responsibilities stemming from sections 3504 and 3511.
---------------------------------------------------------------------------

    \11\ Section 3511(a) provides that the CPEO is treated as the 
sole employer (i.e., solely subject to all provisions of law 
applicable to employers) for purposes of Federal employment taxes 
imposed on remuneration paid to worksite employees, as defined in 
section 7705(e). Therefore, for remuneration paid by a CPEO to 
worksite employees, the employer client is not subject to any 
provisions of law applicable to employers with respect to the 
payment of this remuneration. For this reason, the clarification in 
these final regulations concerning the assessment against employer 
clients of a third-party payor for an erroneous refund of credits 
does not apply to erroneous refunds of credits that were claimed 
based on remuneration paid by a CPEO to worksite employees.
---------------------------------------------------------------------------

    Section 7805(b)(1)(A) and (B) of the Code generally provide that no 
temporary, proposed, or final regulation relating to the Internal 
Revenue laws may apply to any taxable period ending before the earliest 
of (A) the date on which the regulation is filed with the Federal 
Register, or (B) in the case of a final regulation, the date on which a 
proposed or temporary regulation to which the final regulation relates 
was filed with the Federal Register.
    Consistent with the authority provided by section 7805(b)(1)(B), 
Sec. Sec.  31.3111-6, 31.3131-1, 31.3132-1, 31.3134-1, and 31.3221-5 
are applicable to credits paid on or after the date on which the 
related proposed and temporary regulations were filed with the Federal 
Register.

Special Analyses

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.
    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
the Secretary certifies that these final regulations will not have a 
significant economic impact on a substantial number of small entities 
because these final regulations impose no compliance burden on any 
business entities, including small entities. Although these final 
regulations will apply to all employers eligible for the employment tax 
credits under the Families First Act, the CARES Act, and sections 3131, 
3132, and 3134 of the Code, 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 final regulations do not affect 
the employer's employment tax reporting or the necessary information to 
substantiate entitlement to the credits. Rather, these final 
regulations merely implement the statutory authority granted under 
sections 7001(f) and 7003(f) of the Families First Act, section 2301(l) 
of the CARES Act, and sections 3131(g), 3132(g), and 3134(m) of the 
Code 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(a) or 3111(b), whichever is applicable, and 
so much of the taxes imposed under section 3221(a) as are attributable 
to the rate in effect under section 3111(a) or 3111(b), as applicable, 
subject to assessment and administrative collection procedures. 
Notwithstanding this certification, the Treasury Department and the IRS 
did not receive any comments on any impact these regulations would have 
on small entities.

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.

Drafting Information

    The principal author of these final 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 regulations.

List of Subjects in 26 CFR Part 31

    Employment taxes, Fishing vessels, Gambling, 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:
0
a. Removing the entry for Sec.  31.3111-6T;
0
b. Adding an entry in numerical order for Sec.  31.3111-6;
0
c. Removing the entries for Sec. Sec.  31.3131-1T, 31.3132-1T, 31.3134-
1T, and 31.3221-5T
0
d. Adding entries in numerical order for Sec. Sec.  31.3131-1, 31.3132-
1, 31.3134-1. and 31.3221-5.
    The general authority and additions read, in part, as follows:

    Authority:  26 U.S.C. 7805.

    Section 31.3111-6 also issued under secs. 7001 and 7003, Public 
Law 116-127, 134 Stat. 178, and sec. 2301, Public Law 116-136, 134 
Stat. 281.
* * * * *
    Section 31.3131-1 also issued under 26 U.S.C. 3131(g).
    Section 31.3132-1 also issued under 26 U.S.C. 3132(g).
    Section 31.3134-1 also issued under 26 U.S.C. 3134(m)(3).
    Section 31.3221-5 also issued under secs. 7001 and 7003, Public 
Law 116-127, 134 Stat. 178, and sec. 2301, Public Law 116-136, 134 
Stat. 281.
* * * * *

0
Par. 2. Section 31.3111-6 is added to read as follows:


Sec.  31.3111-6  Recapture of credits under the Families First 
Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic 
Security Act.

    (a) Recapture of erroneously refunded credits under the Families 
First Coronavirus Response Act. Any amount of credits for qualified 
sick leave wages or qualified family leave wages under sections 7001 
and 7003, respectively, of the Families First Coronavirus Response Act 
(Families First Act), Public Law 116-127, 134 Stat. 178 (2020), as 
modified by section 3606 of the Coronavirus Aid, Relief, and Economic 
Security Act (CARES Act), Public Law 116-136, 134 Stat. 281 (2020), 
plus any amount of credits for qualified health plan expenses under 
sections 7001 and

[[Page 48124]]

7003, and including any increases in those credits under section 7005 
of the Families First Act, that are treated as overpayments and 
refunded or credited to an employer under section 6402(a) or 6413(b) of 
the Internal Revenue Code (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 by section 3111(a) of 
the Code and may be assessed and collected by the Secretary in the same 
manner as the taxes.
    (b) Recapture of erroneously refunded credits under the Coronavirus 
Aid, Relief, and Economic Security Act. Any amount of credits for 
qualified wages under section 2301 of the CARES Act that is treated as 
an overpayment and refunded or credited to an employer under section 
6402(a) or 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 by section 3111(a) of 
the Code and may be assessed and collected by the Secretary in the same 
manner as the taxes.
    (c) Advance credit amounts erroneously refunded. The determination 
of any amount of credits erroneously refunded as described in 
paragraphs (a) and (b) 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 
7001(b)(4)(A)(ii) and 7003(b)(3)(B) of the Families First Act, as 
modified by section 3606 of the CARES Act, and section 2301(l)(1) of 
the CARES Act.
    (d) Third party payors. For purposes of this section, employers 
against whom an erroneous refund of the credits under sections 7001 and 
7003 of the Families First Act (including any increases in those 
credits under section 7005 of the Families First Act), as modified by 
section 3606 of the CARES Act, and the credits under section 2301 of 
the CARES Act can be assessed as an underpayment of the taxes imposed 
by section 3111(a) include persons treated as the employer under 
sections 3401(d), 3504, and 3511 of the Code, consistent with their 
liability for the section 3111(a) taxes against which the credit 
applied, and also include those persons' common law employer clients 
that remain subject to all provisions of law applicable to employers 
with respect to the payment of wages.
    (e) Applicability date. This section applies to all credit refunds 
under sections 7001 and 7003 of the Families First Act (including any 
increases in those credits under section 7005 of the Families First 
Act), as modified by section 3606 of the CARES Act, advanced or paid on 
or after July 24, 2020, and all credit refunds under section 2301 of 
the CARES Act advanced or paid on or after July 24, 2020.


Sec.  31.3111-6T  [Removed]

0
Par. 3. Section 31.3111-6T is removed.

0
Par. 4. Section 31.3131-1 is added to read as follows:


Sec.  31.3131-1  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 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 section 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 3221(a) taxes against which the credit applied, and 
also include those persons' common law employer clients that remain 
subject to all provisions of law applicable to employers with respect 
to the payment of wages or compensation, as applicable.
    (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 September 8, 2021.


Sec.  31.3131-1T  [Removed]

0
Par. 5. Section 31.3131-1T is removed.

0
Par. 6. Section 31.3132-1 is added to read as follows:


Sec.  31.3132-1  Recapture of credits.

    (a) Recapture of erroneously refunded credits. Any amount of 
credits for qualified family leave wages under section 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 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 section 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 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 3221(a) taxes against which the credit applied, and 
also include those persons' common law employer clients that remain 
subject to all provisions of law applicable to employers with respect 
to the payment of wages or compensation, as applicable.
    (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 September 8, 2021.

[[Page 48125]]

Sec.  31.3132-1T  [Removed]

0
Par. 7. Section 31.3132-1T is removed.

0
Par. 8. Section 31.3134-1 is added to read as follows:


Sec.  31.3134-1  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 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 section 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 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 3221(a) taxes against which the credit applied, and 
also include those persons' common law employer clients that remain 
subject to all provisions of law applicable to employers with respect 
to the payment of wages or compensation, as applicable.
    (d) Applicability date. This section applies to all credit refunds 
under section 3134 advanced or paid on or after September 8, 2021.


Sec.  31.3134-1T  [Removed]

0
Par. 9. Section 31.3134-1T is removed.

0
Par. 10. Section 31.3221-5 is added to read as follows:


Sec.  31.3221-5  Recapture of credits under the Families First 
Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic 
Security Act.

    (a) Recapture of erroneously refunded credits under the Families 
First Coronavirus Response Act. Any amount of credits for qualified 
sick leave wages or qualified family leave wages under sections 7001 
and 7003, respectively, of the Families First Coronavirus Response Act 
(Families First Act), Public Law 116-127, 134 Stat. 178 (2020), as 
modified by section 3606 of the Coronavirus Aid, Relief, and Economic 
Security Act (CARES Act), Public Law 116-136, 134 Stat. 281 (2020), 
plus any amount of credits for qualified health plan expenses under 
sections 7001 and 7003, that are treated as overpayments and refunded 
or credited to an employer under section 6402(a) or 6413(b) of the 
Internal Revenue Code (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 by section 3221(a) of the Code and 
may be assessed and collected by the Secretary in the same manner as 
the taxes.
    (b) Recapture of erroneously refunded credits under the Coronavirus 
Aid, Relief, and Economic Security Act. Any amount of credits for 
qualified wages under section 2301 of the CARES Act that is treated as 
an overpayment and refunded or credited to an employer under section 
6402(a) or 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 by section 3221(a) of 
the Code and may be assessed and collected by the Secretary in the same 
manner as the taxes.
    (c) Advance credit amounts erroneously refunded. The determination 
of any amount of credits erroneously refunded as described in 
paragraphs (a) and (b) 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 
7001(b)(4)(A)(ii) and 7003(b)(3)(B) of the Families First Act, as 
modified by section 3606 of the CARES Act, and section 2301(l)(1) of 
the CARES Act.
    (d) Third party payors. For purposes of this section, employers 
against whom an erroneous refund of the credits under sections 7001 and 
7003 of the Families First Act, as modified by section 3606 of the 
CARES Act, and the credits under section 2301 of the CARES Act can be 
assessed as an underpayment of the taxes imposed by section 3221(a) 
include persons treated as the employer under sections 3401(d), 3504, 
and 3511 of the Code, consistent with their liability for the section 
3221(a) taxes against which the credit applied, and also include those 
persons' common law employer clients that remain subject to all 
provisions of law applicable to employers with respect to the payment 
of compensation.
    (e) Applicability date. This section applies to all credit refunds 
under sections 7001 and 7003 of the Families First Act, as modified by 
section 3606 of the CARES Act, advanced or paid on or after July 24, 
2020, and all credit refunds under section 2301 of the CARES Act 
advanced or paid on or after July 24, 2020.


Sec.  31.3221-5T  [Removed]

0
Par. 11. Section 31.3221-5T is removed.

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
    Approved: July 10, 2023.
Lily L. Batchelder,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2023-15690 Filed 7-24-23; 11:15 am]
BILLING CODE 4830-01-P