IRS’s Large Business & International Division (LB&I) and its Small Business/Self-Employed Division (SB/SE) have instructed their auditors to allow employers who consistently do so, to take the work opportunity tax credit (WOTC) in the year in which they receive the required certification, as opposed to the year in which the employer paid or incurred certified employee’s qualified wages.
Background
In general, Code Sec. 51 provides a WOTC for employers who hire and pay qualified wages, as defined in Code Sec. 51(b) and Code Sec. 51(e), to individuals who are certified members of targeted groups, in accordance with Code Sec. 51(d)(13).
An employer may claim the WOTC upon receipt of a certification that an individual employee is a member of a targeted group. An employer must submit IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to the Designated Local Agency (DLA) as defined in Code Sec. 51(d)(12), also referred to as the State Workforce Agency (SWA), to certify the employee. The Form 8850 is required to be submitted no later than the 28th calendar day after the employee begins to work for the employer. (Code Sec. 51(d)(13)(A)(ii)(II))
After receipt of the certification from the DLA/SWA, employers compute and claim the WOTC in the year in which they paid or incurred certified employees’ qualified wages. (Code Sec. 51(a); Code Sec. 51(b))
Facts
IRS notes that extended delays associated with the WOTC certification process prevent some employers from being able to claim the WOTC on the tax return originally filed for the year in which the qualified wages were paid or incurred. This creates a need for employers to file multiple amended federal and state income tax returns, each year, to claim the WOTC in the year the employer paid or incurred the qualified wages. In lieu of filing amended returns, some employers have claimed the WOTC in the year they receive the delayed certifications for the qualified wages they paid or incurred in earlier year(s).
IRS instructs auditors to permit taking of credit in later year
In a memo to their auditors, LB&I and SB/SE have said that if a taxpayer consistently claims the WOTC in the certification year, then the examiner should allow the taxpayer to claim the WOTC in the certification year. The taxpayer should be allowed an initial transition year to convert from its previous computation methodology to claiming the WOTC in the certification year.
IRS also notes that, in order to be able to take advantage of this policy, the claimed WOTC must comply with all other requirements of Code Sec. 51. Taxpayers must also comply with Code Sec. 280C by reducing their deduction for wages by an amount equal to the WOTC.
The memo also states that the IRS auditor may verify a taxpayer’s WOTC computation by confirming the amount and year qualified wages were paid, the year certifications were received, and that the taxpayer did not include the same qualified wages to compute other credits (e.g., Empowerment Zone (Code Sec. 1396(c)(3)), Indian Employment (Code Sec. 45A(b)(1)(B)), Research Credit (Code Sec. 41(b)(2)(D)(iii)), etc.). Under Code Sec. 6001, the taxpayer should make available to the examiner, upon request, all relevant documentation to substantiate the WOTC.
To continue your research on WOTC, see FTC 2d/FIN ¶ L-17775; United States Tax Reporter ¶ 514.
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