On December 6, 2021, the Internal Revenue Service (IRS) issued guidance in the way of Notice 2021-65 related to the retroactive early sunset of the Employee Retention Credit (ERC). The early sunset of the ERC as of September 30, 2021, rather than December 31, 2021, for all employers except recovery startup businesses was the result of a provision included in the Infrastructure Investment and Jobs Act (IIJA) enacted November 15, 2021.
The guidance applies to employers that paid wages after September 30, 2021, either reduced employment tax deposits in anticipation of the ERC or received an advance payment in connection with the ERC and are now ineligible for the ERC as a result of the changes made by the IIJA.
Employers in receipt of an ERC advance payment: For all employers except recovery startup businesses that have received an advance payment of the ERC for wages paid during the fourth quarter of 2021, failure to pay penalties will generally not apply if repayment is made on or before the due date of their applicable employment tax return that includes fourth quarter 2021 (October 1, 2021 – December 31, 2021). Impacted employers will need to reference the instructions for the relevant employment tax return for additional details.
Employers that reduced employment tax deposits in anticipation of the ERC: For all employers except recovery startup businesses that have reduced one or more employment tax deposits due on or before December 20, 2021 for wages paid after September 30, 2021 but before January 1, 2022, failure to deposit penalties will generally not apply if the employer reduced their deposits pursuant to Notice 2021-24, the previously retained amounts are deposited on or before the applicable due date as if the wages were all paid on December 31, 2021 irrespective to whether or not the wages are actually paid on that date, and reports the liability related to the early sunset of the ERC on the employer's employment tax return or schedule that includes October 1, 2021 through December 31, 2021. Impacted employers will need to reference the instructions for the relevant employment tax return or schedule for details regarding the procedures to report the liability.
No waiver of penalty will apply to failure to deposit penalties for amounts reduced from deposits made after December 20, 2021, for wages paid after September 30, 2021.
For employers that do not qualify for relief under Notice 2021-65, the IRS will consider reasonable cause relief requested in response to a penalty notice.