[Federal Register Volume 89, Number 127 (Tuesday, July 2, 2024)]
[Proposed Rules]
[Pages 54742-54746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-14167]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 31

[REG-109032-23]
RIN 1545-BQ79


Recapture of Interest on Excess Credits Under the Families First 
Act, CARES Act, and ARP

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document sets forth proposed regulations providing that 
the IRS will assess as an underpayment of tax any overpayment interest 
paid to a taxpayer on an erroneous refund of the employment tax credits 
provided under the Families First Coronavirus Response Act, the 
Coronavirus Aid, Relief, and Economic Security Act, and the American 
Rescue Plan Act of 2021. These proposed regulations affect businesses, 
tax-exempt organizations, and certain governmental entities that claim 
the paid sick leave credit and the paid family leave credit under the 
Families First Coronavirus Response Act and the American Rescue Plan 
Act of 2021, and that claim the employee retention credit under the 
Coronavirus Aid, Relief, and Economic Security Act and the American 
Rescue Plan Act of 2021.

DATES: Written or electronic comments and requests for a public hearing 
must be received by August 16, 2024.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically via the Federal eRulemaking Portal at http://www.regulations.gov (indicate IRS and REG-109032-23) by following the 
online instructions for submitting comments. Requests for a public 
hearing must be submitted as prescribed in the ``Comments and Requests 
for a Public Hearing'' section. Once submitted to the Federal 
eRulemaking Portal, comments cannot be edited or withdrawn. The 
Department of the Treasury (Treasury Department) and the IRS will 
publish for public availability any comments submitted to the IRS's 
public docket. Send paper submissions to CC:PA:01:PR (REG-109032-23), 
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin 
Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations, 
Andrew Holubeck at (202) 317-4774 (not a toll-free number); concerning

[[Page 54743]]

submissions of comments and/or requests for a public hearing, Vivian 
Hayes by email at [email protected] (preferred) or by phone at 
(202) 317-6901 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

I. Statutes Providing Employment Tax Credits for COVID-19 Relief

    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), provided COVID-19 related economic relief that included 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. The American Rescue Plan Act of 
2021 (ARP), Public Law 117-2, 135 Stat. 4 (March 11, 2021), provided 
similar paid leave credits under sections 3131, 3132, and 3133 of the 
Code with respect to qualified leave wages paid for a period of leave 
taken beginning April 1, 2021, and ending September 30, 2021.
    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 an employee retention credit (ERC) with respect to 
qualified wages paid after March 12, 2020, and before July 1, 2021, 
respectively. The ARP provided a substantially similar ERC under 
section 3134 of the Code 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 
(December 20, 2021) 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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    The paid sick and family leave credits under the Families First Act 
and sections 3131 through 3133 of the Code and the ERC under the CARES 
Act and section 3134 of the Code (collectively, COVID-19 credits) are 
refundable credits, meaning that if the amount of the credits exceeds 
the taxes against which the credits are taken, then this excess is 
treated as an overpayment that is refunded under sections 6402(a) and 
6413(b). Any amount of the COVID-19 credits claimed by a taxpayer that 
is treated as an overpayment under section 6402(a) or section 6413(b), 
is refunded or credited to the taxpayer. Any such refund to which the 
taxpayer is not entitled, is an erroneous refund that the taxpayer must 
repay.

II. 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 described herein 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, regarding 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 shall 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 those provisions and to recapture the benefit 
of the credit where there is a subsequent adjustment to the credit.
    Regarding the ERC, section 2301(l) of the CARES Act, as amended by 
sections 206 and 207 of the Relief Act, 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(m)(3) of the Code provides, in relevant part, 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 3134.

III. Regulations for the Recapture of Erroneous Refunds of COVID-19 
Credits

    Under the authority provided by the Families First Act, the CARES 
Act, and the ARP, the Treasury Department and the IRS published 
regulations (TD 9978) in the Federal Register on July 26, 2023 (88 FR 
48118) under sections 3111, 3131, 3132, 3134, and 3221 of the Code 
(collectively, Recapture Regulations) that provide for the 
administrative recapture of erroneously refunded COVID-19 credits. 
Under the Recapture Regulations, erroneous refunds of COVID-19 credits 
are treated as underpayments of the taxes imposed under section 3111(a) 
or (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 (b), as applicable, and are, therefore, subject to assessment and 
administrative collection procedures. The Recapture Regulations allow 
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.

IV. Interest on Overpayments Under Section 6611

    Section 6611 provides that interest shall be allowed and paid on 
any overpayment in respect of any Internal Revenue tax at the 
overpayment rate established under section 6621. Section 6611(b)(2) 
provides that interest shall be allowed and paid in the case of a 
refund from the date of the overpayment to a date (determined by the 
Secretary) preceding the date of the refund check by not more than 30 
days. When a taxpayer files an amended return, such as Form 941-X, 
Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, 
claiming COVID-19 credits that were not claimed on the originally filed 
return and resulting in an overpayment, interest is allowed under 
section 6611 on any overpayment refunded to the taxpayer.
    While the Recapture Regulations provide for the assessment of 
erroneous refunds of COVID-19 credits as an underpayment of certain 
employment taxes, they do not address overpayment interest paid to a 
taxpayer on an erroneous refund. These proposed regulations provide for 
the assessment of this interest as an underpayment of tax.
    The Families First Act, CARES Act, and the Code as amended by the 
ARP authorize and require the Secretary to issue regulations to prevent 
the avoidance of the limitations placed on the credits by these 
statutes. When a

[[Page 54744]]

taxpayer is issued an erroneous refund of COVID-19 credits for which 
the taxpayer is not eligible, the taxpayer incurs a liability to repay 
that refund. The taxpayer also incurs a liability to repay any 
overpayment interest paid on the erroneous refund. In pursuing 
collection of these liabilities, the IRS is enforcing the statutory 
limitations on the COVID-19 credits that made the taxpayer's refund, 
and any accompanying overpayment interest, erroneous. Regulations 
providing for the administrative recapture of overpayment interest paid 
on refunds subsequently determined to be erroneous assist in resolving 
taxpayers' repayment liabilities while also preserving administrative 
protections afforded to these taxpayers with respect to contesting 
their tax liabilities under the Code and avoiding unnecessary costs and 
burdens associated with litigation.
    Accordingly, under the authority granted by the Families First Act, 
CARES Act, and the Code, these proposed regulations would amend the 
Employment Tax Regulations (26 CFR part 31) under sections 3111, 3131, 
3132, 3134, and 3221 to provide that overpayment interest paid to 
taxpayers on erroneous refunds of COVID-19 credits is treated as an 
underpayment of the applicable employment taxes and may be assessed and 
collected by the IRS in the same manner as the taxes.

Explanation of Provisions

    These proposed regulations would provide that any overpayment 
interest paid under section 6611 to an employer for an erroneous refund 
of the COVID-19 credits will be treated as an underpayment of the taxes 
imposed under section 3111(a) or (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 (b), as applicable, and may be assessed 
and collected by the Secretary in the same manner as the taxes. These 
proposed regulations would be applicable to all interest amounts paid 
under section 6611 on or after July 2, 2024 for any erroneous refund of 
the COVID-19 credits.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    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.

II. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
the Secretary certifies that these proposed regulations would not have 
a significant economic impact on a substantial number of small entities 
because these proposed regulations impose no compliance burden on any 
business entities, including small entities. Although these proposed 
regulations would apply to all taxpayers 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 would therefore 
be likely to affect a substantial number of small entities, the 
economic impact would not be significant. These proposed regulations do 
not affect the taxpayer's employment tax reporting or the necessary 
information to substantiate entitlement to the credits. Rather, these 
proposed regulations merely implement the statutory authority granted 
under the Families First Act, the CARES Act, and the Code as amended by 
the ARP to issue regulations or other guidance to prevent the avoidance 
of the purposes of the limitations under these provisions by providing 
that overpayment interest paid to taxpayers on erroneous refunds of 
COVID-19 credits is treated as an underpayment of the applicable 
employment taxes and may be assessed and collected by the IRS in the 
same manner as the taxes.

III. Section 7805(f)

    Pursuant to section 7805(f) of the Code, these proposed regulations 
have been submitted to the Chief Counsel of the Office of Advocacy of 
the Small Business Administration for comment on its impact on small 
business.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. These proposed regulations do not include any Federal 
mandate that may result in expenditures by State, local, or Tribal 
governments, or by the private sector, in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These proposed regulations do not 
have federalism implications, do not impose substantial direct 
compliance costs on State and local governments, and do not preempt 
State law within the meaning of the Executive order.

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.

Comments and Requests for a Public Hearing

    Before these proposed amendments to the final regulations are 
adopted as final regulations, consideration will be given to any 
comments that are submitted timely to the IRS as prescribed in this 
preamble under the ADDRESSES heading. The Treasury Department and the 
IRS request comments on all aspects of the proposed regulations. Any 
comments submitted will be available at https://www.regulations.gov or 
upon request. A public hearing will be scheduled if requested in 
writing by any person who timely submits electronic or written 
comments. Requests for a public hearing are also encouraged to be made 
electronically. If a public hearing is scheduled, notice of the date, 
time, and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of these proposed 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 proposed regulations.

List of Subjects in 26 CFR 31

    Employment taxes, Fishing vessels, Gambling, Income taxes, 
Penalties, Pensions, Railroad retirement, Reporting and recordkeeping 
requirements, Social security, Unemployment compensation.

[[Page 54745]]

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 31 as follows:

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

0
Paragraph 1.The authority citation for part 31 continues to 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 amended by:
0
a. Redesignating paragraph (e) as paragraph (f) and adding new 
paragraph (e); and
0
b. Revising newly redesignated paragraph (f).
    The addition and revision 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.

* * * * *
    (e) Recapture of interest on erroneously refunded credits under the 
Families First Act and CARES Act. For purposes of this section, any 
overpayment interest paid under section 6611 to an employer, or any 
third party payor as described in paragraph (d) of this section, with 
respect to an erroneous refund amount described in paragraph (a) or (b) 
of this section shall also be treated as an underpayment of the taxes 
imposed under section 3111(a) of the Code and may be assessed and 
collected by the Secretary in the same manner as the taxes.
    (f) 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, except that 
paragraph (e) of this section applies to all interest amounts paid 
under section 6611 on or after July 2, 2024 for any erroneous refund 
described in paragraph (a) or (b) of this section.
0
Par. 3. Section 31.3131-1 is amended by:
0
a. Redesignating paragraph (d) as paragraph (e) and adding new 
paragraph (d); and
0
b. Revising the newly redesignated paragraph (e).
    The addition and revision read as follows:


Sec.  31.3131-1  Recapture of credits.

* * * * *
    (d) Recapture of interest on erroneously refunded credits. For 
purposes of this section, any overpayment interest paid under section 
6611 to an employer, or any third party payor as described in paragraph 
(c) of this section, with respect to an erroneous refund amount 
described in paragraph (a) of this section shall also 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.
    (e) 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, except 
that paragraph (d) of this section applies to all interest amounts paid 
under section 6611 on or after July 2, 2024 for any erroneous refund 
described in paragraph (a) of this section.
0
Par. 4. Section 31.3132-1 is amended by:
0
a. Redesignating paragraph (d) as paragraph (e) and adding new 
paragraph (d); and
0
b. Revising the newly redesignated paragraph (e).
    The addition and revision read as follows:


Sec.  31.3132-1  Recapture of credits.

* * * * *
    (d) Recapture of interest on erroneously refunded credits. For 
purposes of this section, any overpayment interest paid under section 
6611 to an employer, or any third party payor as described in paragraph 
(c) of this section, with respect to an erroneous refund amount 
described in paragraph (a) of this section shall also 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.
    (e) 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, except 
that paragraph (d) of this section applies to all interest amounts paid 
under section 6611 on or after July 2, 2024 for any erroneous refund 
described in paragraph (a) of this section.
0
Par. 5. Section 31.3134-1 is amended by:
0
a. Redesignating paragraph (d) as paragraph (e) and adding new 
paragraph (d); and
0
b. Revising the newly redesignated paragraph (e).
    The addition and revision read as follows:


Sec.  31.3134-1  Recapture of credits.

* * * * *
    (d) Recapture of interest on erroneously refunded credits. For 
purposes of this section, any overpayment interest paid under section 
6611 to an employer, or any third party payor as described in paragraph 
(c) of this section, with respect to an erroneous refund amount 
described in paragraph (a) of this section shall also 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.
    (e) Applicability date. This section applies to all credit refunds 
under section 3134 advanced or paid on or after September 8, 2021, 
except that paragraph (d) of this section applies to all interest 
amounts paid under section 6611 on or after July 2, 2024 for any 
erroneous refund described in paragraph (a) of this section.
0
Par. 6. Section 31.3221-5 is amended by:
0
a. Redesignating paragraph (e) as paragraph (f) and adding new 
paragraph (e); and
0
b. Revising the newly redesignated paragraph (f).
    The addition and revision read as follows:

[[Page 54746]]

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

* * * * *
    (e) Recapture of interest on erroneously refunded credits under the 
Families First Act and CARES Act. For purposes of this section, any 
overpayment interest paid under section 6611 to an employer, or any 
third party payor as described in paragraph (d) of this section, with 
respect to an erroneous refund amount described in paragraph (a) or (b) 
of this section shall also be treated as an underpayment of the taxes 
imposed under section 3221(a) and may be assessed and collected by the 
Secretary in the same manner as the taxes.
    (f) 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, except paragraph (e) of 
this section applies to all interest amounts paid under section 6611 on 
or after July 2, 2024 for any erroneous refund described in paragraph 
(a) or (b) of this section.

Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2024-14167 Filed 7-1-24; 8:45 am]
BILLING CODE 4830-01-P