The Infrastructure Investment and Jobs Act (Pub.L. 117-58) was enacted on November 15, 2021. One provision revoked the employee retention credit for the fourth quarter unless the employer is a recovery startup business.
The Treasury Department and the IRS issued temporary regulations (TD 9953, 86 FR 50,637) on September 10, 2021. This authorized the assessment and collection for any erroneous refund of the employee retention credit. Any employers who reduced payroll deposits in the fourth quarter will be penalized for failing to deposit (section 6656) because they were not eligible for the credit.
If employers requested advance payments of the employee retention credit for wages paid in the fourth quarter; to avoid penalties, they must repay the excess advance payments by the due date for the applicable employment tax return, including the fourth calendar quarter of 2021 (in most cases, December 20, 2021).
The IRS has graciously decided to waive the penalty if all of the following apply (Notice 2021-65):
- The employer reduced its deposits in anticipation of the employee retention credit
- The employer deposits the amounts initially retained in anticipation of the employee retention credit on or before the relevant due date for wages paid on December 31, 2021 (in most cases, this is December 20, 2021)
- The employer reports the tax liability resulting from the employer’s employee retention credit termination on the applicable employment tax return or schedule that includes the fourth quarter.
If an employer does not qualify for relief as above, it may reply to a notice about a penalty with an explanation and the IRS will consider reasonable cause relief under section 6656(a).
Remember that if any qualifying wages were paid prior to September 30, 2021, the credit can still be claimed in the fourth quarter.