The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have finalized rules for the recapture of erroneously claimed Employee Retention Credits (ERC) and other tax credits provided to employers for COVID-19 paid sick and family leave, treating them as an underpayment of taxes that may be assessed and collected. The new final rules were published on July 26, 2023, and remove and replace the temporary and proposed regulations released in 2020 and 2021.

Quick Hits

• The Treasury Department and the IRS finalized rules for the recapture of erroneously distributed ERC and paid sick and family leave tax credits.
• The final rules, effective July 24, 2023, treat erroneous tax credits as underpayments of taxes that may be assessed and collected.

COVID-19 Tax Credits

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020 just after the onset of the pandemic, provided the employee retention credit (ERC), a fully refundable tax credit against the employer component of employment tax (Social Security and Railroad Retirement) equal to 50 percent of qualified wages paid. The credit was later expanded to 70 percent of qualified wages by the American Rescue Plan Act (ARPA).

The Families First Coronavirus Response Act (FFCRA), enacted in March 2020, provided relief from economic hardships due to the COVID-19 pandemic. This relief included offering payroll tax credits for wages paid for mandatory leave under the Emergency Paid Sick Leave Act...

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