Court upholds strict certification for Work Opportunity Tax Credit

A federal appeals court has found an employer cannot claim the Work Opportunity Credit (WOTC) for employees who were eventually denied certification by a state employment agency.  Merely applying for certification was insufficient to claim the credit. Certification required an affirmative act by the state employment agency.

WOTC

The WOTC is a federal tax credit that rewards private-sector businesses for hiring individuals from target groups, such as certain individuals receiving government assistance, veterans and others. Participating employers can reduce their federal income tax liability. A tax credit of up to 40 percent of the first $6,000, or up to $2,400, in wages paid during the first 12 months for each new hire. Employers must submit a special IRS form to their state employment agencies, which, in turn, certify that an individual is a member of a target group.

Certification

In this case, the taxpayer hired individuals who were members of target groups under the WOTC. A state agency certified many of the individuals as members of a targeted group. However, the same state agency also denied many applications for target group status. Undeterred, the taxpayer claimed the WOTC for all of the employees. The taxpayer argued that its applications for certification were sufficient to claim the tax credit. The Court of Appeals for the Federal Circuit disagreed.

Court’s decision

The court found that merely applying for certification was insufficient. Congress intended certification -- not merely application for certification -- to be an integral, rather than optional, part of the statute. Further, the court found that the taxpayer could not challenge the denial of a state certification in a federal tax proceeding.


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