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IRS Guidance on Retroactive Termination of ERC

by Phillip D. Zlokas, CPA, Tax Director

As discussed in the blog post entitled ‘Changes to the Employee Retention Credit’ (November 17, 2021), the Infrastructure Investment and Jobs Act (IIJA) retroactively terminated the Employee Retention Credit (ERC) as of September 30, 2021. At the time of the termination, there had been no guidance provided relative to how employers should remedy situations in which, in anticipation of receiving the ERC in the fourth quarter, they retained payroll taxes for wages paid post-September 30, 2021. The IRS has provided much awaited guidance on this issue with the release of Notice 2021-65.

The IRS guidance applies to employers who received an advance payment of the ERC for wages paid after September 30, 2021, or reduced employment tax deposits anticipating ERCs for the fourth quarter of the 2021 calendar year and are now ineligible for the ERC due to the law change under the IIJA.

For employers who received advance payments of the ERC and are now ineligible for the ERC due to the change in law, they will avoid failure to pay penalties if they repay those amounts by the due date of their applicable employment tax returns.

For employers who reduced employment tax deposits anticipating ERCs for the fourth quarter of the 2021 calendar year, they will not be subject to a failure to pay deposit penalty for federal tax deposits retained on or before December 20, 2021, if:

  1. the employer reduced its deposits consistent with previous IRS guidance relating to the ERC,
  2. the employer deposits the retained amounts on or before the relevant due date for wages paid on December 31, 2021 (regardless of whether the employer pays wages on that date), and
  3. the employer reports the tax liability resulting from the termination of the ERC on its employment tax return or schedule that includes the fourth quarter of the 2021 calendar year.

If you have any questions about the IRS guidance and how it affects you, please do not hesitate to contact your H2R CPA liaison for more information.

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