IRS guidance on early ERC repeal and penalty relief

On Dec. 6, 2021, the IRS released Notice 2021-65 (Notice) which covers the early repeal of the employee retention credit (ERC). The Infrastructure Investment and Jobs Act, signed into law on Nov. 15, 2021, revoked the credit for wages paid by nonrecovery startup businesses after Sept. 30, 2021.As this repeal was retroactive, numerous employers who, as allowed under prior law, had already withheld payroll tax deposits in anticipation of fourth-quarter credits they would be owed or had applied for advances of the credit via IRS Form 7200.

Pursuant to the Notice, employers described above will not be subject to interest or penalties (including the penalty for failure to deposit employment taxes) if they meet the following conditions:

1. Payroll tax deposits due on or before Dec. 20, 2021, for wages paid between Oct. 1, 2021, and Dec. 31, 2021, are repaid on or before the payroll tax deposit due date for wages paid on Dec. 31, 2021 (regardless of whether the employer paid any wages on Dec. 31, 2021). These amounts must have been withheld pursuant to previous IRS guidance, and the liability resulting from the early repeal must be reported on the employer’s employment tax return that includes the period from Oct. 1, 2021, through Dec. 31, 2021.
2. Advance payments received are repaid by the due date for their applicable employment tax return that includes the fourth calendar quarter of 2021.

The Notice does not provide specific procedures for how the amounts should be repaid, instead directing employers to the instructions for their applicable payroll tax returns. Additionally, employers ineligible for relief under the guidance are advised to reply to an IRS notice of penalty with a corresponding explanation, for consideration of reasonable cause relief.

Lastly, based on the statutory language of IRC section 3134(n), wages paid after Sept. 30, 2021 (or Dec. 31, 2021, in the case of a recovery startup business) cannot be qualified, even if they relate to services performed (or not performed in the case of a large employer) during an employer’s period of eligibility.

We encourage you to connect with your Baker Tilly advisor regarding how any of the above may affect your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.