Larson was competing in Sunday's eNASCAR iRacing event when he appeared to lose communication with his spotter on his headset. During a microphone check, Larson said, "You can't hear me?" That comment was followed by the "N-word."
The event was live-streamed, making the slur audible for other competitors and viewers.
Larson issued a public apology Monday, saying there was "no excuse" for the racial language. Later Monday, his three main sponsors in the Cup Series ended their relationships with him.
On Tuesday, Chip Ganassi Racing announced it fired Larson, leaving him without a team to drive for in real-life competition.
"What Larson said was wrong, whether in private or public. There is no grey area," Wallace wrote Thursday on Twitter. "I saw the incident the night it happened and within five minutes Kyle texted me. He called me the next morning as well. Finally I called him back with a FaceTime to talk 'face to face,' and we had a good conversation, his apology was sincere. His emotions and pride were shattered.
"We discussed why he chose to use that language and I shared my thoughts. I told him, it was too easy for him to use the word and that he has to do better and get it out of his vocabulary. There is no place for that word in this world. I am not mad at him, and I believe that he, along with most people, deserve second chances, and deserve space to improve."
NASCAR handed down an indefinite suspension to Larson following the incident. He also was suspended indefinitely from iRacing.
Larson, 27, was in the final year of his contract with Chip Ganassi Racing. He is in his sixth year of competing in NASCAR's Cup Series. He was in seventh place in the Cup Series standings before racing was suspended due to the coronavirus pandemic.