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In a Joint Directive (Directive) issued October 15, 2019, the IRS's Large Business & International and Small Business/Self-Employed Divisions instructed their examiners that taxpayers may claim the Work Opportunity Tax Credit (WOTC) in the year they receive WOTC certification. The Directive stems from a 14-month consultation among the IRS, EY, and the American Staffing Association (ASA) via the IRS's Industry Issue Resolution (IIR) Program.

Background

The WOTC allows a general business credit for employers that hire and pay qualified wages, as defined in IRC Section 51(b) and IRC Section 51(e), to individuals who are certified members of targeted groups, in accordance with IRC Section 51(d)(13).¹ To claim the WOTC, an employer must submit IRS Form 8850 to the applicable State Workforce Agency (SWA) to establish that the employee is a member of a targeted group. The deadline for submitting Form 8850 is the 28th calendar day after the employee begins working for the employer. After receiving SWA certification, the employer computes and claims the WOTC in the year in which the employer paid or incurred the certified employee's qualified wages.

Certifications, however, sometimes arrive from the SWA after the taxpayer has filed its return for the applicable tax year. Consequently, taxpayers historically had to amend their federal and state returns for multiple years to claim the WOTC in the year the qualified wages were paid or incurred. As a result of this onerous process, some employers resorted to the administrative practice of claiming the WOTC in the year the certification was received.

In the absence of clear guidance on this issue, IRS examiners have been inconsistent in their treatment of this administrative practice during audits. In several cases, taxpayers that claimed the WOTC in the year they received the certification experienced lengthy examinations that did not result in a deficiency assessment but required significant time, money and resources from both the taxpayer and the IRS.

IIR Program

EY worked with the ASA to submit a request for this WOTC issue to be resolved through the IIR Program. The objective of the IIR Program is to identify and resolve frequently disputed or burdensome tax issues that are common to a significant number of entities.² The WOTC issue was accepted into the IRS's IIR Program in August 2018.

Directive

The Directive allows taxpayers to choose to continue amending their returns to claim the WOTC in the year wages are paid or incurred, or to claim the WOTC in the year the certification is received. The Directive instructs examiners that they "shall not challenge the timing of when a taxpayer claims the WOTC, if the claimed WOTC complies with all requirements of IRC [Section] 51, but the WOTC is claimed in the year the taxpayer receives the delayed certification (Certification Year)."

In addition, taxpayers that currently amend returns to claim the WOTC in the year qualified wages were paid or incurred are allowed a transition year to convert to claiming the WOTC in the Certification Year if they elect to do so.

Further, to comply with the wage addback under IRC Section 280C, "taxpayers claiming the WOTC under the Directive must not claim or have claimed a deduction for wages, equal to the WOTC." When following the Certification Year approach, the taxpayer must add back the corresponding wages in the same tax year in which the credit is taken. The purpose of this limitation is to make sure that the taxpayer does not receive a double benefit by receiving the WOTC and a deduction on the same set of wages.

The Directive also instructs examiners that, when auditing the WOTC, they may verify a taxpayer's computation by confirming the amount and year qualified wages were paid, the year certifications were received, and that the taxpayer did not use the same qualified wages to compute other general business credits.

Implications

The solution provided by the Directive is a notable enhancement to the WOTC program that benefits all taxpayers. Taxpayers that have already adopted the Certification Year approach will benefit from the certainty that examiners will not challenge this approach on audit. Taxpayers that currently amend their returns to claim the WOTC in the year wages were paid or incurred, and elect to transition to the Certification Year approach, will likely benefit by allocating less time and resources to amending returns. Administrative relief from the burden of amending prior-year returns also removes a key barrier for employers trying to hire the economically disadvantaged in a particularly tight labor market.

The Directive does not specify a time by which the taxpayer must make such an election. The Directive instead states that, once the election is made, the taxpayer is expected to continue claim the WOTC in the Certification Year in a consistent manner.

In the event WOTC is not extended or made permanent before it expires on December 31, 2019, and the WOTC program goes into hiatus, the Directive ensures that taxpayers will be able to continue claiming the WOTC in the Certification Year following the approach outlined in the Directive.

For additional insights, join our Thought Center webcast on the Work Opportunity Tax Credit: Legislative Outlook and Recent IRS Developments scheduled for Wednesday, November 20 (1-2 pm ET; 12-1 CT). Register for the webcast here.

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ENDNOTES

¹ For purposes of the WOTC, targeted groups include those that traditionally experience barriers to employment, including disabled veterans, the long-term unemployed, recipients of vocational rehabilitation services, and recipients of certain governmental assistance programs.

² Issues that are most appropriate for consideration under the IIR Program include those in which (i) the proper tax treatment of a common factual situation is uncertain, (ii) the uncertainty results in frequent, and often repetitive, examinations of the same issue, (iii) frequent, and often repetitive, examinations require significant resources from both the IRS and affected entities, (iv) the issue is significant and affects a large number of entities, and (v) collaboration would facilitate proper resolution of the tax issues by promoting an understanding of entities' views and business practices.