IRS releases guidance on retroactive termination of employee retention credit

Notice 2021-65 provides guidance for employers that:

• Paid wages after September 30, 2021
• Received an advance payment of the ERC for those wages or reduced employment tax deposits anticipating an ERC for the fourth quarter of 2021, and
• Are now ineligible for the ERC for the fourth quarter of 2021 due to the law change.

Employers that received an advance payment of the ERC for wages paid in the fourth quarter of 2021 will avoid failure-to-pay penalties if they make a repayment of the advance amount by the due date of their applicable employment tax return.

Employers that reduced employment tax deposits anticipating an ERC for the fourth quarter of 2021 will not be subject to failure to deposit penalties for federal tax deposits retained on or before December 20, 2021, if:

1. The employer reduced its deposits consistent with the rules in section 3.b. of Notice 2021-24,
2. The employer deposits the retained amounts on or before the relevant due date for wages paid on December 31, 2021, and
3. The employer reports the tax liability resulting from the termination of the employer’s ERC on its employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021.

The IRS will not waive failure to deposit penalties for employers if they reduce deposits after December 20, 2021, for wages paid after September 30, 2021.

Mazars' insight

Taxpayers who received advance payments or reduced employment tax deposits in anticipation of claiming the ERC for wages paid after September 30, 2021, need to determine if they are eligible for the ERC under the recovery startup business provision.  If they are not recovery startups, taxpayers must determine the appropriate method of repayment of the anticipated ERC to avoid penalties.

Please contact your Mazars USA LLP professional for additional information.

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.