A Joint Directive, released by the IRS this week, provides instructions to Large Businesses and International (LB&I) and Small Business and Self Employed (SB/SE) examiners on the treatment of Work Opportunity Tax Credit (WOTC) examinations under IRC § 51. Specifically, this Joint Directive is effective for all LB&I and SB/SE taxpayers claiming the WOTC in the year their eligible employees are certified.
To use resources effectively and to reduce administrative burden, examiners shall not challenge the timing of when a taxpayer claims the WOTC, if the claimed WOTC certification complies with all requirements of IRC § 51, but the WOTC is claimed in the year the taxpayer receives the delayed certification (Certification Year). To comply with IRC § 280C, taxpayers claiming the WOTC under this Directive must not claim or have claimed a deduction for wages, equal to the WOTC.
If an examiner audits the WOTC, the examiner should first determine the taxpayer’s WOTC computation methodology. If the taxpayer consistently claims the WOTC in the Certification Year, then the examiner should follow this Directive and 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.
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 (e.g., Empowerment Zone (IRC § 1396(c)(3)), Indian Employment (IRC § 45A(b)(1)(B)), Research Credit (IRC § 41(b)(2)(D)(iii)), etc.). Under IRC § 6001, the taxpayer should make available to the examiner, upon request, all relevant documentation to substantiate the WOTC.
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