The IRS Large Business and International Division (LB&I) and Small Business/Self-Employed Division (SBSE) have issued a joint directive to provide instructions to LB&I and SBSE examiners on the treatment of Work Opportunity Tax Credit (WOTC) examinations under Code Sec. 51. The directive is effective for all LB&I and SB/SE taxpayers claiming the WOTC in the year their eligible employees are certified.
The WOTC is provided for employers who hire and pay qualified wages to individuals who are certified members of targeted groups under 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.
However, extended delays associated with the WOTC certification process have prevented 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. The delays have forced employers to file multiple amended federal and state income tax returns each year. Further, instead of filing amended returns, some employers have claimed the WOTC in the year they received the delayed certifications for the qualified wages they paid or incurred in earlier years.
To use resources effectively and reduce the administrative burden, examiners are instructed not to challenge the timing of when a taxpayer claims the WOTC, provided the claimed WOTC complies with all the requirements of Code Sec. 51 but the WOTC is claimed in the year the taxpayer receives the delayed certification (certification year). To comply with Code Sec. 280C, taxpayers claiming the WOTC under the directive must not claim or have claimed a deduction for wages equal to the WOTC. If a WOTC is audited, the examiner must determine the taxpayer’s WOTC computation methodology. If the taxpayer has consistently claimed the WOTC in the certification year, then the examiner must follow this directive and allow the taxpayer to claim the WOTC in the certification year. Moreover, the taxpayer should be allowed an initial transition year to convert to claiming the WOTC in the certification year from its previous computation methodology.
Under Code Sec. 6001, a taxpayer must make all relevant documentation to substantiate the WOTC available to the examiner upon request.