Targeted Jobs Tax Credit Settlement Offer

A new settlement initiative by the IRS may offer certain employers who respond quickly an unexpected refund opportunity. In News Release IR-2000-48, the Service announced a settlement initiative relating to the Targeted Jobs Tax Credit (previously Sec. 51), later replaced by the Work Opportunity Credit. The settlement initiative offers employers an opportunity to settle long-standing refund claims in an expedient manner by accepting 50% of the credit claimed. The purpose of the initiative is to avoid further litigation between the IRS and employers claiming the credit, when the Service has denied the credit because the employer failed to obtain certification from the appropriate state employment agency that its new hires belonged to any of the targeted groups. Of interest to practitioners is that the notice also indicates that the settlement initiative is available to employers who now file timely refund claims.

One of the requirements to claim the credit is that the employer must timely request certification from the responsible state agency that an employee was a member of a targeted group. Many employers, however, were unable to receive the required certifications, for a variety of reasons. One reason cited by the IRS is the discontinuation of the certification process by some state agencies as a result of the expiration of Federal funding in 1994. In 1999, a Maryland district court, in Perdue Farms, Inc., held that Perdue was entitled to a refund of over $2.1 million on Targeted Jobs Tax Credits it had not previously claimed, because it had attempted to obtain certification but was unable to do so when the appropriate state agency had stopped issuing certificates.

A timely request is either a written request submitted to the appropriate state agency on or before the day the individual began work, or, if the individual presented the employer with a written preliminary determination that he is a member of a targeted group, a written request to the state agency no later than five days after start of employment. (Query: What if the appropriate state or local agency did not exist at the time the employee was hired and the certification could not be obtained?)

Only taxpayers satisfying all the credit requirements (except for certification) and having timely claimed the credit are being offered the settlement option. Cases currently in litigation before Federal district courts or Appeals courts are not included in this settlement initiative, and should be discussed with the U.S. Department of Justice attorneys handling them. The procedures necessary to participate in this program for taxpayers whose claims are pending with the IRS are outlined below.

The initial step necessary to participate in the program is completion and remittance of an Indication of Interest to: Internal Revenue Service, Kansas City, MO 64999, Attention: QMSS, Stop 4100, Annex 2. The Indication of Interest must be mailed within 120 days after IRS Announcement 2000-58 (which provides an example of the format suggested for the Indication of Interest) appears in the Internal Revenue Bulletin (IRB 2000-30, 7/10/00). Any taxpayer currently in litigation before the Tax Court for the years the credit is being claimed, before Appeals or under examination, should also provide a copy of the Indication of Interest to the appropriate Service employee. If a timely refund claim is not currently pending and the statute of limitations within which to make a refund claim is still open, the taxpayer should submit its claim to the IRS, together with the Indication of Interest.

The Service will then issue instructions to the taxpayer indicating the information necessary to determine the Verified Noncertified Employee Claims. The following information will be required, and must be certified under penalties of perjury, for each employee claimed: name and Social Security number, targeted group the employee belongs to, employee's start date and end date (if applicable), amount of eligible wages and the amount of credit claimed. The taxpayer must also indicate it timely submitted a request for certification.

After the IRS has reviewed the information and determined the claims subject to the settlement offer, the taxpayer will be required to execute a closing agreement.

Taxpayers in this situation should consider carefully the opportunity to participate in the settlement initiative. The settlement represents only 50% of the credit they may otherwise be entitled to. On the other hand, litigation could be very expensive and the outcome unknown. At a minimum, taxpayers that do not have a claim pending should consider filing a protective refund claim to preserve their rights. While the Service has taken a hard line on allowing the credit without obtaining the required certifications, the court in Perdue noted that, "[t]o the extent Treasury Regulation section 1.51-1(d)(1) requires an employer to receive certification before the targeted jobs tax credit may be claimed, it is in conflict with congressional intent and is void" (emphasis added).

From Greg J. Menia, CPA, Aidman, Piser & Company, PA, Tampa, FL