The IRS has posted a directive jointly issued by the Large Business & International (LB&I) and Small Business/Self-Employed (SB/SE) divisions as instructions for IRS examiners on the treatment of work opportunity tax credit (WOTC) examinations under section 51.
The joint directive provides that examiners are not to challenge the timing of when a taxpayer claims the WOTC, if the claimed WOTC complies with all requirements of section 51, but the WOTC is claimed in the year the taxpayer receives a delayed certification from the state workforce agency.
The joint directive—LB&I-04-1019-011 (dated October 10, 2019)—is effective for all LB&I and SB/SE taxpayers claiming the WOTC in the year their eligible employees are certified.
The joint directive identifies the WOTC under section 51 as follows:
The directive further explains 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).
The joint directive provides that examiners are not to challenge the timing of when a taxpayer claims the WOTC, if the claimed WOTC complies with all requirements of section 51, but the WOTC is claimed in the year the taxpayer receives the delayed certification. To comply with section 280C, taxpayers claiming the WOTC must not claim or have claimed a deduction for wages equal to the WOTC.
If an examiner audits the WOTC, the examiner is directed:
The joint directive concludes that the examiner 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 (such as empowerment zone, Indian employment, research credit, etc.). The taxpayer is to make available to the examiner, upon request, all relevant documentation to substantiate the WOTC.
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