These final regulations amend Procedure and Administration Regulations (26 CFR part 301) under section 7602(a) of the Code relating to participation by persons described in section 6103(n) of the Code and 26 CFR §301.6103(n)-1(a) of the Procedure and Administration Regulations in receiving and reviewing summoned books, papers, records, or other data and in interviewing a summoned witness under oath. These final regulations narrow the scope of the final regulations (TD 9778) published in the Federal Register (81 FR 45409) on July 14, 2016 (Summons Interview Regulations) by providing that certain non-government attorneys whom the IRS could previously have hired are no longer authorized to participate in an examination and by interpreting the requirements of section 7602(f), which was added to the Code by the Taxpayer First Act of 2019. A notice of proposed rulemaking (REG-132434-17) proposing these changes was published in the Federal Register (85 FR 47931) on August 7, 2020 (proposed regulations).

No public hearing was requested or held regarding the proposed regulations. Two responsive comments were received, both of which concerned only one portion of the proposed regulations – proposed §301.7602-1(b)(3)(C), titled “Hiring of certain non-government attorneys.”

The first commenter recommended modifying the proposed rules to allow any outside contractors working for the IRS to examine, interview, and determine whether a taxpayer was a “tax cheat.” The Department of the Treasury (Treasury Department) and the IRS decline to adopt this comment. While the IRS may hire a contractor to assist the IRS in these processes, examining a taxpayer and determining whether that taxpayer is in compliance with Federal tax laws are core IRS functions that the IRS has never allowed a contractor to perform. In addition, section 7602(f) now prohibits the IRS from allowing an IRS contractor to ask substantive questions of a witness whose testimony is being taken under oath pursuant to section 7602.

The second commenter noted that the non-exclusive nature of the proposed regulations left open the possibility that the IRS could hire as a contractor in an IRS examination a certified public accountant (CPA), enrolled agent, or another non-attorney to provide the IRS with assistance in the application of Federal tax laws. This commenter asserted that the proposed regulations should be revised so as to prohibit the IRS from hiring as a contractor in an examination any person, whether or not an attorney, for that person’s expertise with the Federal tax laws. The Treasury Department and the IRS decline to adopt this comment. The limitation on hiring attorneys as contactors in examinations for their expertise in applying the Federal tax laws is a measure that goes beyond what is required by section 7602(f). This hiring limitation was introduced as a matter of sound tax administration to address concerns expressed by a range of professional and business associations over the IRS’s prior use of attorneys as contractors. While the previous commenters addressing the Summons Interview Regulations and Notice 2017-38, 2017-30 I.R.B. 147, noted the potential hazards that could arise from the IRS hiring attorney contractors for their expertise with Federal tax laws, the hiring of a CPA or other accountant by the IRS as a contractor has not been established as a widely held concern. Accordingly, the Treasury Department and the IRS have determined (1) that hiring outside CPAs and accountants as contractors in an examination does not pose the same potential risk to tax administration that prior commenters had identified for the IRS hiring of outside attorneys, who are trained at developing facts and taking testimony, and (2) that the IRS is justified in contracting for the resources and expertise of CPAs and accountants from outside of the IRS in certain large or complex cases.

The preamble to proposed regulations explained the various provisions of the proposed regulations in detail. Because these final regulations adopt the proposed regulations without any modifications, any persons interested in understanding the provisions of these final regulations should consult the preamble discussion of these provisions in the proposed regulations.

These regulations are not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. Therefore, a regulatory impact assessment is not required.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these regulations do not impose a significant economic impact on a substantial number of small entities. The final regulations mainly affect the IRS and do not impose requirements on small entities. Thus, no economic impact will result from these regulations on any small entity. Accordingly, the Secretary of the Treasury’s delegate certifies that the rule will not have a significant economic impact on a substantial number of small entities.

Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these final regulations was submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comments on its impact on small business. No comments were received from the Chief Counsel for the Office of Advocacy of the Small Business Administration.

The principal author of these final regulations is William V. Spatz of the Office of Associate Chief Counsel (Procedure and Administration). However, other personnel from the Treasury Department and the IRS participated in their development.

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.

Accordingly, 26 CFR part 301 is amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The general authority citation for part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 301.7602-1 is amended:

1. In paragraph (b)(2), by adding “(Secretary)” at the end of the first sentence.

2. By revising paragraphs (b)(3) and (d).

The revisions read as follows:

§ 301.7602-1 Examination of books and witnesses.

* * * * *

(b)* * *

(3) Participation of a person described in section 6103(n)—(i) IRS contractor access to books and records obtained by the IRS administratively—(A) In general. The Secretary may not, under the authority of section 6103(n), provide any books, papers, records, or other data obtained pursuant to section 7602 to any person authorized under section 6103(n), except when such person requires such information for the sole purpose of providing expert evaluation and assistance to the IRS.

(B) Persons providing expert evaluation and assistance. For the purposes of paragraph (b)(3)(i)(A) of this section, persons providing expert evaluation and assistance may include, but are not limited to, the following:

(1) Persons with specialized expertise in certain substantive areas, including, but not limited to, economists, engineers, attorneys specializing in an area relevant to an issue in the examination (such as patent law, property law, environmental law, or foreign, state, or local law (including foreign, state, or local tax law)), industry experts, or other subject-matter experts;

(2) Persons providing support as ancillary service contractors including, but not limited to, court reporters, translators or interpreters, photocopy services, providers of data processing programs or equipment, litigation support services, or other similar contractors; and

(3) Whistleblower-related contractors described in § 301.6103(n)-2.

(C) Hiring of certain non-government attorneys. The IRS may not hire an attorney as a contractor to assist in an examination under section 7602 unless the attorney is hired by the IRS as a specialist in foreign, state, or local law (including foreign, state, or local tax law), or in non-tax substantive law that is relevant to an issue in the examination, such as patent law, property law, or environmental law, or is hired for knowledge, skills, or abilities other than providing legal services as an attorney.

(ii) IRS contractor participation in an IRS summons interview—(A) In general. No person other than an officer or employee of the IRS or its Office of Chief Counsel may, on behalf of the Secretary, question a witness under oath whose testimony was obtained pursuant to section 7602. Persons authorized by section 6103(n) and with whom the Secretary may provide books, papers, records, or other data obtained pursuant to section 7602 may also attend a summons interview and provide assistance to the IRS or Office of Chief Counsel employees in attendance, but may not question the summoned witness under oath or ask a summoned person’s representative to clarify an objection or assertion of privilege.

(B) Court reporters, translators, and interpreters are not barred from asking questions. Court reporters who are hired as contractors by the IRS to make a record of an IRS summons interview are permitted to ask typical housekeeping questions of a summoned witness. Examples of such questions include, but are not limited to, asking whether the witness swears to tell the truth, asking the witness to spell a word or phrase, and asking whether the witness can speak up or speak rather than gesture an answer. Translators and interpreters who are hired as contractors by the IRS to assist in the interview of a summoned witness are permitted to translate any of the questions that are asked of the witness by an IRS or Office of Chief Counsel officer or employee and to ask questions which may be necessary to clarify the translation.

* * * * *

(d) Applicability date. This section is applicable after September 3, 1982, except for paragraphs (b)(1) and (2) of this section, which are applicable on and after April 1, 2005, and paragraph (b)(3) of this section, which applies to examinations begun or administrative summonses served by the IRS on or after August 6, 2020. For rules under paragraphs (b)(1) and (2) of this section that are applicable to summonses issued on or after September 10, 2002 or under paragraph (b)(3) of this section that are applicable to summons interviews conducted on or after June 18, 2014 and before July 14, 2016, see 26 CFR 301.7602-1T (revised as of April 1, 2016). For rules under paragraph (b)(3) of this section that are applicable to administrative summonses served by the IRS before August 6, 2020, see 26 CFR 301.7602-1 (revised as of April 1, 2020).

Douglas W. O’Donnell,

Deputy Commissioner for Services and Enforcement.

Approved: August 20, 2021

Mark J. Mazur,

Acting Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on September 2, 2021, 4:15 p.m., and published in the issue of the Federal Register for September 7, 2021, 86 FR 49923)

The Families First Coronavirus Response Act (Families First Act), Pub. L. 116-127, 134 Stat. 178 (March 18, 2020), the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. 116-136, 134 Stat. 281 (March 27, 2020), the COVID-related Tax Relief Act of 2020 (Tax Relief Act), enacted as Subtitle B of Title II of Division N of the Consolidated Appropriations Act, 2021, Pub. L. 116-260, 134 Stat.1182 (December 27, 2020), the Taxpayer Certainty and Disaster Relief Tax Act of 2020 (Relief Act), enacted as Division EE of the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act of 2021 (the ARP), Pub. L. 117-2, 135 Stat. 4 (March 11, 2021), provide relief to taxpayers from economic hardships resulting from the Coronavirus Disease 2019 (COVID-19). As described below, this relief includes employment tax credits for certain wages paid by employers.

Sections 3131(b)(3), 3131(b)(4)(A), 3131(f)(1), 3132(b)(2), 3132(b)(3)(A), 3132(f)(1), 3134(b)(2), 3134(b)(3), and 3134(c)(1) provide that the credits described in these sections are taken against the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, (although for the employee retention credit, the taxes are first reduced by any paid sick and family leave credits). Additionally, if the amount of the credits exceeds these taxes for any calendar quarter, then the excess shall be treated as an overpayment to be refunded or credited under sections 6402(a) and 6413(b). Any credits claimed that exceed the amount to which the employer is entitled and that are actually credited or refunded by the IRS are considered to be erroneous refunds of these credits. Section 3134(j)(3)(B) provides that if a small eligible employer specified in section 3134(j)(2) receives excess advance payments of the credit, then the taxes imposed under section 3111(b) or so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, for the calendar quarter are increased by the amount of the excess.

These temporary regulations provide that erroneous refunds of these credits are treated as underpayments of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable. These temporary regulations authorize the IRS to assess any credits erroneously credited, paid, or refunded in excess of the amount allowed as if those amounts were taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, subject to assessment and administrative collection procedures. This allows the IRS to prevent the avoidance of the purposes of the limitations under the credit provisions and to recover the erroneous refund amounts efficiently, while also preserving administrative protections afforded to taxpayers with respect to contesting their tax liabilities under the Code and avoiding unnecessary costs and burdens associated with litigation. These assessment and administrative collection procedures may apply in the normal course in processing employment tax returns that include advances in excess of claimed credits and in examining returns for excess claimed credits. These assessment and administrative collection procedures do not replace the existing recapture methods, but rather represent an alternative method available to the IRS.

Specifically, these temporary regulations provide that any amount of the credits for qualified leave wages and certain collectively bargained contributions under sections 3131 and 3132, plus any amount of credits for qualified health plan expenses under sections 3131(d) and 3132(d), and including any increases in these credits under section 3133, and any amount of the employee retention credit for qualified wages under section 3134 of the Code that are erroneously refunded or credited to an employer shall be treated as underpayments of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, by the employer and may be administratively assessed and collected in the same manner as the taxes. These temporary regulations provide that the determination of any amount of credits erroneously refunded must take into account any credit amounts advanced to an employer under the process established by the IRS in accordance with sections 3131(b)(4)(B), 3132(b)(3)(B) and 3134(j)(2).

In certain situations, third-party payors claim tax credits on behalf of their common law employer clients. These temporary regulations address this situation by providing that employers against which an erroneous refund of credits may be assessed as an underpayment include persons treated as the employer under sections 3401(d), 3504, and 3511, consistent with their liability for the employment taxes against which the credits applied.

Sections 3131(h) and 3132(h) provide that the paid sick and family leave credits apply to wages paid with respect to a period of leave taken beginning on April 1, 2021 and ending on September 30, 2021. Section 3134(n) provides that the employee retention tax credit applies to wages paid after June 30, 2021, and before January 1, 2022.

Pursuant to section 7805(b)(2) of the Code, these temporary regulations are permitted to apply before the dates provided under section 7805(b)(1), including the date on which these temporary regulations are filed with the Federal Register, because these temporary regulations are being issued within 18 months of the date of the enactment of the relevant statutory provisions. Accordingly, these temporary regulations apply to all credits under sections 3131 and 3132, including any increases to the credits under section 3133, credited or refunded on or after April 1, 2021, including advanced refunds, as well as all credits under section 3134 that are credited or refunded on or after July 1, 2021, including advanced refunds. These applicability dates correspond to the effective dates of the statutory sections that provide for these credits and that authorize guidance to allow for the administrative recapture of erroneous refunds of these credits.

The Office of Management and Budget’s Office of Information and Regulatory Analysis has determined that these temporary regulations are not significant and not subject to review under section 6(b) of Executive Order 12866.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), the Secretary certifies that these temporary regulations will not have a significant economic impact on a substantial number of small entities because these temporary regulations impose no compliance burden on any business entities, including small entities. Although these temporary regulations will apply to all employers eligible for the tax credits under sections 3131, 3132, and 3134, including small businesses and tax-exempt organizations with fewer than 500 employees, and will therefore be likely to affect a substantial number of small entities, the economic impact will not be significant. These temporary regulations do not affect the employer’s employment tax reporting or the necessary information to substantiate entitlement to the credits. Rather, these temporary regulations merely implement the statutory authority granted under sections 3131(g), 3132(g), and 3134(m) that authorize the IRS to assess, reconcile, and recapture any portion of the credits erroneously credited, paid, or refunded in excess of the actual amount allowed as if the amounts were taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, subject to assessment and administrative collection procedures. Notwithstanding this certification, the Treasury Department and the IRS invite comments on any impact these temporary regulations would have on small entities.

Pursuant to section 7805(f), these temporary regulations have been submitted to the Chief Counsel of the Office of Advocacy of the Small Business Administration for comment on its impact on small business.

The Treasury Department and the IRS have determined that there is good cause to issue these regulations as temporary regulations. Employers were required to file Form 941, Employer’s Quarterly Federal Tax Return, for the second quarter of calendar year 2021 by July 31, 2021, as required by section 6071 of the Code and Treas. Reg. § 31.6071(a)-1. Employers use Form 941 to claim paid sick and family leave credits and the employee retention credit, as well as to report any advance of these credits they received during the calendar quarter. In filing their second quarter 2021 Form 941, some employers may have already received, as an advance, refund amounts in excess of the credits to which they are entitled. In addition to the statutory authority provided by section 3134(j)(3) with regard to erroneous advance refunds of the employee retention credit, these temporary regulations authorize the assessment of any erroneous refunds of the credits. Without these temporary regulations, in some instances the IRS may not be able to avoid bringing costly and burdensome litigation to recover the erroneous refunds. Further, comments are being solicited in the cross-referenced notice of proposed rulemaking that is in this issue of the Federal Register, and any comments will be considered before final regulations are issued.

IRS notices and other guidance cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.

The principal author of these temporary regulations is NaLee Park, Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Treasury Department and the IRS participated in the development of these temporary regulations.

Employment taxes, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social security, Unemployment compensation.

Accordingly, 26 CFR part 31 is amended as follows:

PART 31—EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

Paragraph 1. The authority citation for part 31 is amended by adding entries for §§31.3131-1T, 31.3132-1T, and 31.3134-1T in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805.

* * * * *

Section 31.3131-1T also issued under 26 U.S.C. 3131(g).

Section 31.3132-1T also issued under 26 U.S.C. 3132(g).

Section 31.3134-1T also issued under 26 U.S.C. 3134(m)(3).

* * * * *

Par. 2. Section 31.3131-1T is added to read as follows:

§31.3131-1T Recapture of credits.

(a) Recapture of erroneously refunded credits. Any amount of credits for qualified sick leave wages under section 3131(a), including any increase to the amount of the credits under sections 3131(d), 3131(e), and 3133, that are treated as overpayments and refunded or credited to an employer under section 6402(a) or section 6413(b) and to which the employer is not entitled, resulting in an erroneous refund to the employer, shall be treated as an underpayment of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, and may be assessed and collected by the Secretary in the same manner as the taxes.

(b) Advance credit amounts erroneously refunded. The determination of any amount of credits erroneously refunded as described in paragraph (a) of this section must take into account any amount of credits advanced to an employer under the process established by the Internal Revenue Service in accordance with sections 3131(b)(4)(B) and 3131(g)(6).

(c) Third party payors. For purposes of this section, employers against whom an erroneous refund of the credits under section 3131 (including any increases in those credits under section 3133), can be assessed as an underpayment of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, include persons treated as the employer under sections 3401(d), 3504, and 3511, consistent with their liability for the section 3111(b) or 3121(a) taxes against which the credit applied.

(d) Applicability date. This section applies to all credit refunds under section 3131 (including any increases in those credits under section 3133), advanced or paid on or after April 1, 2021.

Par. 3. Section 31.3132-1T is added to read as follows:

§31.3132-1T Recapture of credits.

(a) Recapture of erroneously refunded credits. Any amount of credits for qualified family leave wages under sections 3132, including any increase to the amount of the credits under sections 3132(d), 3132(e), and 3133, that are treated as overpayments and refunded or credited to an employer under section 6402(a) or section 6413(b) and to which the employer is not entitled, resulting in an erroneous refund to the employer, shall be treated as an underpayment of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, and may be assessed and collected by the Secretary in the same manner as the taxes.

(b) Advance credit amounts erroneously refunded. The determination of any amount of credits erroneously refunded as described in paragraph (a) of this section must take into account any amount of credits advanced to an employer under the process established by the Internal Revenue Service in accordance with sections 3132(b)(3)(B) and 3132(g)(6).

(c) Third party payors. For purposes of this section, employers against whom an erroneous refund of the credits under section 3132 (including any increases in those credits under section 3133), can be assessed as an underpayment of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3121(a) as are attributable to the rate in effect under section 3111(b), as applicable, include persons treated as the employer under sections 3401(d), 3504, and 3511, consistent with their liability for the section 3111(b) or 3121(a) taxes against which the credit applied.

(d) Applicability date. This section applies to all credit refunds under section 3132 (including any increases in those credits under section 3133) advanced or paid on or after April 1, 2021.

Par. 4. Section 31.3134-1T is added to read as follows:

§31.3134-1T Recapture of credits.

(a) Recapture of erroneously refunded credits. Any amount of credits for qualified wages under section 3134 of the Code that is treated as an overpayment and refunded or credited to an employer under section 6402(a) or section 6413(b) of the Code and to which the employer is not entitled, resulting in an erroneous refund to the employer, shall be treated as an underpayment of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, and may be assessed and collected by the Secretary in the same manner as the taxes.

(b) Advance credit amounts erroneously refunded. The determination of any amount of credits erroneously refunded as described in paragraph (a) of this section must take into account any amount of credits advanced to an employer under the process established by the Internal Revenue Service in accordance with sections 3134(j) and 3134(m).

(c) Third party payors. For purposes of this section, employers against whom an erroneous refund of the credits under section 3134 can be assessed as an underpayment of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3121(a) as are attributable to the rate in effect under section 3111(b), as applicable, include persons treated as the employer under sections 3401(d), 3504, and 3511, consistent with their liability for the section 3111(b) or 3121(a) taxes against which the credit applied.

(d) Applicability date. This section applies to all credit refunds under section 3134 advanced or paid on or after July 1, 2021.

Douglas W. O’Donnell,

Deputy Commissioner for Services and Enforcement.

Approved: August 18, 2021.

Mark J. Mazur,

Acting Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on September 7, 2021, 8:45 a.m., and published in the issue of the Federal Register for September 8, 2021, 86 FR 50295)

¹ Section 9641 of the ARP added sections 3131(f)(5) and 3132(f)(5) to the Code, which extend paid sick and family leave credits to certain governmental employers (without regard to the number of employees). However, the credits are not allowed for the government of the United States, or any agency or instrumentality of the United States government, except for an organization described in section 501(c)(1) of the Code and exempt from tax under section 501(a) of the Code.

² For more information on the paid sick and family leave credits, including who is an “individual” for purposes of this “substantially similar” condition, see Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021 for Leave After March 31, 2021 | Internal Revenue Service (irs.gov) at https://www.irs.gov/newsroom/tax-credits-for-paid-leave-under-the-american-rescue-plan-act-of-2021-for-leave-after-march-31-2021.

³ For purposes of certain governmental organizations or entities as described in section 3134(f)(2) of the Code, wages as defined in section 3121(a) are determined without regard to paragraphs (5), (6), (7), (10), and (13) of section 3121(b) (except with respect to services performed in a penal institution by an inmate thereof).

⁴ Section 6413(a) addresses interest-free adjustments of overpayments. The section provides that if more than the correct amount of employment tax imposed by section 3101, 3111, 3201, 3221, or 3402 is paid with respect to any payment of remuneration, proper adjustments with respect to both the tax and the amount to be deducted, shall be made, without interest, in such manner and at such times as the Secretary may by regulations prescribe.

⁵ As a general matter, ”non-rebate” refers to the portion of any refund of a tax credit that exceeds the IRS’s determination of the recipient’s tax liability (i.e., the remaining portion of the refund that is paid to the recipient after the refund has been applied to the recipient’s tax liability).

The Families First Act and sections 3131 and 3132 of the Code provide refundable tax credits to employers with fewer than 500 employees (eligible employers) to reimburse them for the cost of providing qualified leave wages. Sections 3131 and 3132 also permit certain governmental employers to claim these tax credits, without regard to the number of their employees.⁴ Accordingly, when this notice addresses the credits provided under these Code sections, the term “eligible employer” also includes these governmental employers.

Division E of the Families First Act, the Emergency Paid Sick Leave Act (EPSLA), and Division C of the Families First Act, the Emergency Family and Medical Leave Expansion Act (EFMLEA), generally required eligible employers to provide paid sick leave and expanded family and medical leave, respectively, beginning April 1, 2020, through December 31, 2020, up to specified limits, to employees unable to work or telework due to certain circumstances related to COVID-19. The EPSLA entitled workers to up to 80 hours of paid sick time and the EFMLEA entitled workers to up to 10 weeks of paid family and medical leave if they were unable to work for certain reasons related to COVID-19. The Families First Act also provided eligible employers with fully refundable tax credits to cover the cost of the leave required to be paid under the EPSLA and EFMLEA. The requirement that eligible employers provide leave under the EPSLA and EFMLEA does not apply after December 31, 2020. However, the Tax Relief Act extended the availability of the tax credits under the Families First Act through March 31, 2021, for paid leave that would have satisfied the EPSLA or EFMLEA requirements.

Specifically, sections 7001 and 7003 of the Families First Act provide refundable tax credits against the tax imposed by section 3111(a) of the Code (referring to the eligible employer’s share of the social security portion of the Federal Insurance Contributions Act (FICA) tax), and so much of the Railroad Retirement Tax Act (RRTA) Tier 1 tax as is attributable to the rate in effect under section 3111(a), on all wages or compensation paid to all employees for each calendar quarter in an amount equal to the qualified leave wages paid by the eligible employer, plus allocable qualified health plan expenses, with respect to leave provided to employees beginning April 1, 2020, through March 31, 2021. The credits under sections 7001 and 7003 of the Families First Act are increased by the amount of the tax imposed by section 3111(b) of the Code (referring to the eligible employer’s share of Medicare tax) and so much of the RRTA Tier 1 tax imposed as is attributable to the rate in effect under section 3111(b) on qualified leave wages. See section 7005(b)(1) of the Families First Act.

Section 9641 of the ARP added sections 3131 through 3133 to the Code, which extend the availability of the credits for paid leave through September 30, 2021. Section 3131 provides the credit for paid sick leave, section 3132 provides the credit for paid family leave, and section 3133 provides that the credits allowed under sections 3131 and 3132 are increased by the eligible employer’s share of both the social security and Medicare portions of FICA tax (and the eligible employer’s share of the RRTA Tier 1 tax) imposed on the qualified leave wages. Sections 3131 and 3132 of the Code provide that eligible employers are entitled to claim refundable tax credits with respect to leave provided voluntarily to employees beginning April 1, 2021, through September 30, 2021, if the leave would have satisfied the EPSLA or EFMLEA requirements.⁵ Specifically, sections 3131 and 3132 of the Code provide refundable tax credits against the tax imposed by section 3111(b) (referring to an eligible employer’s share of Medicare tax), and so much of the RRTA Tier 1 tax as is attributable to the rate in effect under section 3111(b), on all wages or compensation paid to all employees for each calendar quarter in an amount equal to the qualified leave wages paid by the eligible employer plus (i) the allocable qualified health plan expenses and (ii) certain collectively bargained contributions allocable to qualified leave wages. See sections 3131(d), 3131(e), 3132(d), and 3132(e).

Sections 7001(c) and 7003(c) of the Families First Act and sections 3131(f)(2) and 3132(f)(2) of the Code define the terms wages and compensation to mean “wages” as defined in section 3121(a), but without regard to section 3121(b)(1) through (22), and “compensation” as defined in section 3231(e), but without regard to the exclusions under section 3231(e)(1).⁶

A self-employed individual carrying on a trade or business in 2021 within the meaning of section 1402 who would have received qualified leave wages if the individual were treated as an employee of an employer (other than himself or herself) may claim refundable tax credits if the individual is unable to work or telework (eligible self-employed individual). Specifically, sections 7002 and 7004 of the Families First Act permit an eligible self-employed individual to claim refundable tax credits for qualified sick leave equivalent amounts and qualified family leave equivalent amounts (qualified leave equivalent amounts) if the individual is unable to work or telework during the period beginning April 1, 2020, through March 31, 2021, due to certain circumstances related to COVID-19. Sections 9642 and 9643 of the ARP permit an eligible self-employed individual to claim refundable tax credits for qualified leave equivalent amounts if the individual is unable to work or telework during the period beginning April 1, 2021, through September 30, 2021, due to certain circumstances related to COVID-19. An eligible self-employed individual may have to reduce qualified leave equivalent amounts by some or all of the qualified leave wages the individual received from an employer. See sections 7002 and 7004 of the Families First Act and sections 9642 and 9643 of the ARP.

Sections 7002(g) and 7004(e) of the Families First Act provide that the Secretary of the Treasury will prescribe such regulations or other guidance as may be necessary to carry out the purposes of sections 7002 and 7004 of the Families First Act, respectively. Section 9642(h) and section 9643(h) of the ARP provide that the Secretary of the Treasury will prescribe such regulations or other guidance as may be necessary to carry out the purposes of sections 9642 and 9643 of the ARP, respectively.

With respect to paid leave provided under the Families First Act to employees beginning January 1, 2021, through March 31, 2021, qualified sick leave wages are wages and compensation, as defined under section 7001(c), paid for leave that would have satisfied the requirements of the EPSLA. In general, eligible employers are permitted to claim refundable tax credits if they provide employees with up to 80 hours of paid sick leave due to the employee being unable to work or telework because the employee—

(1) is subject to a Federal, State, or local quarantine or isolation order related to COVID- 19;

(2) has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;

(3) is experiencing symptoms of COVID-19 and seeking a medical diagnosis;

(4) is caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;

(5) is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID-19 precautions; or

(6) is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretaries of the Treasury and Labor.⁷

An employee who receives paid sick leave due to the inability to work or telework for reasons related to COVID-19 described in (1), (2), or (3) above must be paid sick leave wages at the employee’s regular rate of pay or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $511 per day and $5,110 in the aggregate, for the eligible employer to claim the credit for leave provided to that employee during the period beginning April 1, 2020, through March 31, 2021. An employee who receives paid sick leave due to the inability to work or telework for reasons related to COVID-19 described in (4), (5), or (6) above must be paid sick leave wages at two-thirds the employee’s regular rate of pay or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $200 per day and $2,000 in the aggregate. Because the sick leave wage cap is not increased for the period beginning January 1, 2021, and ending March 31, 2021, no more than $5,110 (or $2,000 for absences described in (4), (5), and (6) above) in the aggregate may be claimed by an employer with respect to leave provided to an employee during the period beginning April 1, 2020, through March 31, 2021.

With respect to paid leave provided to employees during the period beginning January 1, 2021, through March 31, 2021, qualified family leave wages are wages and compensation, as defined under section 7003(c) of the Families First Act, paid for leave that would have satisfied the requirements of the EFMLEA. In general, eligible employers are permitted to claim refundable tax credits if they provide employees with up to 10 weeks of paid family leave due to the employee being unable to work or telework because the employee is caring for a son or daughter whose school or place of care is closed or whose child care provider is unavailable for reasons related to COVID-19. To receive the credit, the eligible employer must pay the employee family leave wages at two-thirds the employee’s regular rate of pay, up to $200 per day and $10,000 in the aggregate. Because the family leave wage cap is not increased for the period beginning January 1, 2021, and ending March 31, 2021, no more than $10,000 in the aggregate may be claimed by an employer with respect to leave provided to an employee during the period beginning April 1, 2020, through March 31, 2021.

If a self-employed individual is entitled to a refundable tax credit for a qualified sick leave equivalent amount under section 7002(a) of the Families First Act and also receives qualified sick leave wages as an employee, section 7002(d)(3) of the Families First Act reduces the qualified sick leave equivalent amount for which the eligible self-employed individual may claim a credit to the extent that the sum of the qualified sick leave equivalent amount described in section 7002(c) of the Families First Act and any qualified sick leave wages under section 7001(b)(1) of the Families First Act exceeds $2,000 (or $5,110 in the case of any day any portion of which is paid sick time described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA). Similarly, if a self-employed individual is entitled to a refundable tax credit for a qualified family leave equivalent amount under section 7004(a) of the Families First Act and also receives qualified family leave wages as an employee, section 7004(d)(3) of the Families First Act reduces the qualified family leave equivalent amount for which the self-employed individual may claim a credit to the extent that the sum of the qualified family leave equivalent amount described in section 7004(c) of the Families First Act and the qualified family leave wages under section 7003(b)(1) of the Families First Act exceeds $10,000.

Under the Families First Act, the requirement to reduce qualified leave equivalent amounts is not applied separately for 2020 and 2021. Instead, the reduction to the qualified leave equivalent amounts in each case is figured using the sum of the qualified leave equivalent amounts and the qualified leave wages for the entire period beginning April 1, 2020, through March 31, 2021. As a result, if an eligible self-employed individual reduced a qualified sick leave equivalent amount for 2020 because the sum of the qualified sick leave equivalent amount and the qualified sick leave wages exceeded $5,110, then no credit under section 7002 of the Families First Act will be available for 2021. Likewise, if an eligible self-employed individual reduced a qualified family leave equivalent amount for 2020 because the sum of the qualified family leave equivalent amount and the qualified family leave wages exceeded $10,000, then no credit under section 7004 of the Families First Act will be available for 2021.

With respect to leave provided under sections 3131 and 3132 of the Code to employees beginning April 1, 2021, through September 30, 2021, qualified sick leave wages are wages and compensation, as defined under section 3131(f)(2), paid with respect to leave that would have satisfied the requirements of the EPSLA. In general, eligible employers are permitted to claim refundable tax credits under section 3131 if they provide employees with up to 80 hours of paid sick leave due to the employee being unable to work or telework because the employee—

(1) is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;

(2) has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;

(3) is experiencing symptoms of COVID-19 and is seeking a medical diagnosis; or is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19 and has been exposed to COVID-19, or the employer has requested such test or diagnosis, or is obtaining immunization related to COVID-19 or is recovering from any injury, disability, illness, or condition related to such immunization;⁸

(4) is caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19 or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;

(5) is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID-19 precautions; or

(6) is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretaries of the Treasury and Labor, including if the employee is accompanying an individual to obtain immunization related to COVID-19, or is caring for an individual who is recovering from any injury, disability, illness, or condition related to the immunization.⁹

An employee who receives paid sick leave due to the inability to work or telework for reasons related to COVID-19 described in paragraphs (1), (2), or (3) above after March 31, 2021, and before October 1, 2021, must be paid sick leave wages at the employee’s regular rate of pay or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $511 per day and $5,110 in the aggregate for the eligible employer to claim the credit for leave provided to that employee beginning April 1, 2021, through September 30, 2021. An employee who receives paid sick leave due to the inability to work or telework for reasons related to COVID-19 described in paragraphs (4), (5), or (6) above after March 31, 2021, and before October 1, 2021, must be paid sick leave wages at two-thirds of the employee’s regular rate of pay or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $200 per day and $2,000 in the aggregate for the eligible employer to claim the credit for leave provided to that employee beginning April 1, 2021, through September 30, 2021.

With respect to leave provided to employees during the period beginning April 1, 2021, through September 30, 2021, qualified family leave wages are wages and compensation, as defined under section 3132(f)(2) of the Code, paid with respect to leave that would have satisfied the requirements of the EFMLEA. In general, eligible employers are permitted to claim refundable tax credits under section 3132 if they provide employees with up to 12 weeks of paid family leave due to the employee being unable to work or telework for any of the same reasons for which an employee can take paid sick leave. To receive the credit, the eligible employer must pay the employee family leave wages at two-thirds of the employee’s regular rate of pay, up to $200 per day and $12,000 in the aggregate, with respect to leave provided to that employee during the period beginning April 1, 2021, through September 30, 2021.

If a self-employed individual is entitled to a refundable tax credit for a qualified sick leave equivalent amount under section 9642(a) of the ARP and also receives qualified sick leave wages as an employee, section 9642(e)(2) of the ARP reduces the qualified sick leave equivalent amount for which the eligible self-employed individual may claim a credit to the extent that the sum of the qualified sick leave equivalent amount described in section 9642(c) of the ARP and any qualified sick leave wages under section 3131(b)(1) of the Code exceeds $2,000 (or $5,110 in the case of any day any portion of which is paid sick time described in paragraph (1), (2), or (3) of section 5102(a) of the EPSLA). Similarly, if a self-employed individual is entitled to a refundable tax credit for a qualified family leave equivalent amount under section 9643(a) of the ARP, and also receives qualified family leave wages that meet the requirements of the EFMLEA, section 9643(e)(2) of the ARP reduces the qualified family leave equivalent amount for which the self-employed individual may claim a credit to the extent that the sum of the qualified family leave equivalent amount described in section 9643(c) of the ARP and the qualified family leave wages under section 3132(b)(1) of the Code exceeds $12,000.

Qualified leave wages paid in 2021 under the Families First Act and sections 3131 and 3132 of the Code are to be reported in Box 1 of Form W-2. To the extent that qualified leave wages are social security wages or Medicare wages, they must also be included in Box 3 (up to the social security wage base) and Box 5, respectively. To the extent qualified leave wages are compensation subject to the RRTA, they must also be included in Box 14 under the appropriate RRTA reporting label(s).¹¹

In addition to the regular reporting requirements, employers must report to the employee the following types and amounts of the wages that were paid, with each amount separately reported either in Box 14 of Form W-2 or on a separate statement:¹²

If a separate statement is provided and the employee receives a paper Form W-2, then the statement must be included with the Form W-2 sent to the employee, and if the employee receives an electronic Form W-2, then the statement must be provided in the same manner and at the same time as the Form W-2.

If an employer that does not claim credits under these provisions or an employer that is prohibited from claiming those credits erroneously reports sick leave wages or family leave wages to an employee on Form W-2, Box 14, or on a separate statement, the employer must either furnish a Form W-2c, Corrected Wage and Tax Statement, or provide a corrected statement to the employee correcting the erroneous reporting. The Form W-2c or corrected statement should be sent only to the employee. The employer should not file Form W-2c with the Social Security Administration solely to correct the amount in Box 14.

As part of the Instructions for Employee, under the instructions for Box 14, for the Forms W-2, or in a separate statement sent to the employee, the employer may provide additional information about qualified sick leave wages and qualified family leave wages and explain that these wages may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income. The following model language (modified as necessary) may be used. Please note that this language has been modified from that suggested in Notice 2020-54.

“Included in Box 14, if applicable, are amounts paid to you as qualified sick leave wages or qualified family leave wages under the Families First Coronavirus Response Act and/or sections 3131 and 3132 of the Internal Revenue Code. Specifically, up to six types of paid qualified sick leave wages or qualified family leave wages may be reported in Box 14:

If you have self-employment income in addition to wages paid by your employer, and you intend to claim any qualified sick leave or qualified family leave equivalent credits, you must report the qualified sick leave or qualified family leave wages on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with your income tax return, and may have to reduce (but not below zero) any qualified sick leave or qualified family leave equivalent credits by the amount of these qualified leave wages. If you have self-employment income, you should refer to the instructions for your individual income tax return for more information.”

Temporary regulations in the Rules and Regulations section of this issue of the Federal Register amend the Employment Taxes and Collection of Income at the Source Regulations (26 CFR part 31) under sections 3131, 3132, and 3134 of the Internal Revenue Code (Code) pursuant to the regulatory authority granted under these sections to prescribe regulations as may be necessary for recapturing the benefit of the employment tax credits provided under these sections when necessary and to prevent the avoidance of the purposes of the limitations under these sections. Consistent with this authority, these proposed regulations authorize the assessment of erroneous refunds of the credits paid under sections 3131, 3132 (including any increases in those credits under section 3133), and 3134. The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.

The Office of Management and Budget’s Office of Information and Regulatory Analysis has determined that these regulations are not significant and not subject to review under section 6(b) of Executive Order 12866.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), the Secretary certifies that these proposed regulations will not have a significant economic impact on a substantial number of small entities because these proposed regulations impose no compliance burden on any business entities, including small entities. Although these proposed regulations will apply to all employers eligible for the credits under sections 3131, 3132, and 3134, including small businesses and tax-exempt organizations with fewer than 500 employees as well as certain governmental employers, and therefore are likely to affect a substantial number of small entities, the economic impact will not be significant. These proposed regulations do not affect the employer’s employment tax reporting or the necessary information to substantiate entitlement to the credits. Rather, these proposed regulations merely implement the statutory authority granted under sections 3131(g), 3132 (g), 3134(j), and 3134(m) that authorize the Service to assess, reconcile, and recapture any portion of the credits erroneously paid or refunded in excess of the actual amount allowed as if those amounts were taxes imposed under section 3111(b) (the Hospital Insurance tax (Medicare tax)), and so much of the taxes imposed under section 3221(a) (the Railroad Retirement Tax Act Tier 1 tax) as are attributable to the rate in effect under section 3111(b), as applicable, subject to assessment and administrative collection procedures. Notwithstanding this certification, the Treasury Department and the IRS invite comments on any impact these regulations would have on small entities.

Pursuant to section 7805(f), this notice of proposed rulemaking has been submitted to the Chief Counsel of the Office of Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are timely submitted to the IRS as prescribed in the preamble under the “ADDRESSES” section. The Treasury Department and the IRS request comments on all aspects of these proposed regulations. Any electronic comments submitted, and to the extent practicable any paper comments submitted, will be made available at www.regulations.gov or upon request.

A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a hearing are strongly encouraged to be submitted electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register. Announcement 2020-4, 2020-17 IRB 1, provides that until further notice, public hearings conducted by the IRS will be held telephonically. Any telephonic hearing will be made accessible to people with disabilities.

IRS notices and other guidance cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.

The principal author of these regulations is NaLee Park, Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Treasury Department and the IRS participated in the development of these regulations.

Employment taxes, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social security, Unemployment compensation.

Accordingly, 26 CFR part 31 is proposed to be amended as follows:

PART 31—EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

Paragraph 1. The authority citation for part 31 is amended by adding entries for §§31.3131-1, 31.3132-1, and 31.3134-1 in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805.

* * * * *

Section 31.3131-1 also issued under 26 U.S.C. 3131(g).

Section 31.3132-1 also issued under 26 U.S.C. 3132(g).

Section 31.3134-1 also issued under 26 U.S.C. 3134(m)(3).

* * * * *

Par. 2. Section 31.3131-1 is added to read as follows:

§31.3131-1 Recapture of credits.

[The text of proposed §31.3131-1 is the same as the text of §31.3131-1T published elsewhere in this issue of the Federal Register].

Par. 3. Section 31.3132-1 is added to read as follows:

§31.3132-1 Recapture of credits.

[The text of proposed §31.3132-1 is the same as the text of §31.3132-1T published elsewhere in this issue of the Federal Register].

Par. 4. Section 31.3134-1 is added to read as follows:

§31.3134-1 Recapture of credits.

[The text of proposed §31.3134-1 is the same as the text of §31.3134-1T published elsewhere in this issue of the Federal Register].

Douglas W. O’Donnell,

Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on September 7, 2021, 8:45 a.m., and published in the issue of the Federal Register for September 8, 2021, 86 FR 50295)