IRS issues guidance on the retroactive termination of the ERC

IR 2021-242, 12/6/2021; Notice 2021-65, 2021-51 IRB

The IRS has issued guidance for employers on the retroactive termination of the Employee Retention Credit (ERC). The ERC was retroactively terminated as of September 30, 2021, except for employers that are a recovery startup business.

Infrastructure Investment and Jobs Act. Originally created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act; PL 116-136), the American Rescue Plan Act (ARP Act, ARPA; PL 117-2) extended the ERC for wages paid through December 31, 2021.

However, the Infrastructure Investment and Jobs Act (IIJA; PL 117-58), which was signed into law on November 15, 2021, amended the ERC so that employers can only claim it for wages paid through September 30, 2021, unless the employer is a recovery start up business.

New guidance for employers who claimed the ERC. The new guidance, Notice 2021-65, 2021-51 IRB, applies to employers that:

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

Employers that received advance payments of the ERC. Generally, employers (that are not recovery startup businesses) that received advance payments of the ERC for wages paid in the fourth quarter of 2021 will avoid failure to pay penalties if they repay those amounts by the due date of their applicable employment tax returns.

Employers that reduced employment tax deposits anticipating ERCs. Employers (that are not recovery startup businesses) will not be subject to a failure to deposit penalty for federal tax deposits retained on or before December 20, 2021, if:

1. The employer reduced its deposits consistent with the rules in Notice 2021-24, 2021-18 IRB 1122;
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 employer’s ERC on its employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021 (fourth quarter of the 2021 calendar year). Employers should refer to the instructions to the applicable employment tax return or schedule for additional information on how to report the tax liability.

For more information about the rules for reducing federal tax deposits to claim the ERC, see IRS provides additional relief from failure to deposit penalties (04/14/2021).

The IRS will not waive failure to deposit penalties for employers (other than recovery startup businesses) if they reduce deposits after December 20, 2021, for wages paid after September 30, 2021.

An employer that does not qualify for relief under Notice 2021-65, may reply to a penalty notice with an explanation and the IRS will consider reasonable cause relief.