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The IRS will treat erroneous refunds of COVID-19-related paid sick and family leave and employee retention credits paid to employers as underpayment of taxes, according to new temporary regulations. 

Under the American Rescue Plan Act (ARPA), employers with fewer than 500 employees can claim tax credits for paid sick or family leave wages to employees unable to work due to issues related to COVID-19.  The ARPA paid leave credits mirror the employer eligibility requirements originally enacted as part of the Families First Coronavirus Response Act, which required employers to provide the pandemic-related leave.

Eligible employers are able to receive advance payment of the employment tax credits and are required to reconcile those payments with the actual credits claimed and total taxes due. According to temporary regulations published September 9, any overpayments made by the IRS from either advance payments or regular refunds paid to the employer will be treated as erroneous refunds of the employment credits.

Under ARPA, eligible employers may claim the employee retention credit through December 31, 2021.  The credit was initially implemented as part of the Coronavirus Aid, Relief, and Economic Security Act and allows employers to claim certain wages paid to employees, including some health insurance costs.


Mary Bachinger

Director, Tax Policy


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