July 26, 2023

The Internal Revenue Service has published a final rule to reconcile advanced payments of refundable employment tax credits and recapture the benefits of these credits when necessary. The regulations specifically authorize the assessment of taxes for erroneous refunds of the credits paid under the American Rescue Plan Act and, specifically, Internal Revenue Code (IRC) sections 3131 (Credit for Paid Sick Leave), section 3132 and 3133 (Payroll Credit for Paid Family Leave), and section 3134 (Employee Retention Credit).  

Through this final rule, the IRS is clarifying that erroneous refunds of the credits under sections 3131 through 3134 will be treated as underpayments of certain taxes. The rule authorizes the IRS to assess any credits erroneously credited, paid, or refunded in excess of the amount allowed as if those amounts were taxes imposed under these sections, subject to assessment and administrative collection procedures. The IRS states that this will allow the agency to, among other things, “recover the erroneous refund amounts efficiently while also preserving administrative protections afforded to taxpayers with respect to contesting their tax liabilities under the IRC and avoiding unnecessary costs and burdens associated with litigation.”

This final rule is effective as of July 24, 2023.

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