Compliance Worries Mount as IRS Takes on Tax Credit Labor Rules

The Biden administration has tasked the IRS with ensuring companies are following the labor requirements tied to green energy tax incentives in this year’s tax-and-climate law, creating a new role for the agency with little time to stand up its enforcement plans.

Businesses and investors could see a beefed-up tax credit of 30% if they agree to follow certain labor rules in the Inflation Reduction Act, including paying laborers and mechanics the local prevailing wage and using trained workers participating in a registered apprenticeship program to complete a share of the work.

However, the provisions, which President Joe Biden said will be the key to federal green investments and good-paying union jobs, create myriad new responsibilities for everyone. The provisions also are sparking concerns about how investors and developers will comply, as well as whether the government can ensure the tax credits aren’t being abused.

Businesses that haven’t worked with training programs will have to learn to navigate the registered apprenticeship system, which also could mean a first-time interaction with a labor union. IRS enforcers also will be learning how to audit the new tax credit, which involves wage and apprenticeship standards typically overseen by the US Department of Labor.

“The IRS does not really want to take on responsibility for an area of law it doesn’t know” and may involve a labor expert or DOL liaison to help with labor questions, said Lisa Zarlenga, a partner at Steptoe & Johnson LLP, and former Treasury tax legislative counsel.

Labor Department referred questions to US Treasury representatives. Treasury spokespeople confirmed the IRS would have labor rules enforcement responsibilities.

Murky Reporting Details

Businesses that adhere to the specific labor requirements in the IRA could see their tax credit jump to 30% from 6%.

However, the initial guidance on the prevailing wage and apprenticeship requirements, released Nov. 29, didn’t detail that reporting will be required, only that “sufficient records” should be kept to support that labor rules are met. This leaves developers and investors wondering what records they should file and how the requirements should be put in contracts—including those that are already underway.

It is unclear if the IRS will require the turnover of wage information “because these are private contracts as opposed to contracts with the government,” Zarlenga said. “And so it remains to be seen how much information they’ll require you to turn over.”

The requirements take effect Jan. 29, but the IRS has yet to create a new reporting regime or new form ahead of the 2024 filing season.

Businesses and their tax advisers need clarity on what records should be kept and for how long since some of the credits may not be subject to recapture until years after the credit was claimed, said Michelle Abel, a partner at Baker Tilly who specializes in credits and incentives.

Atypical Davis-Bacon Dilemma

The Inflation Reducation Act requires companies that violate the prevailing wage portion to pay the worker back the difference in wages with interest and pay a fine of $5,000 per worker to the DOL, a penalty that increases if the employer was found to have intentionally disregarded the rules. The labor guidance from Treasury and the IRS noted this requirement under the Inflation Reduction Act but didn’t provide more details.

Typically on federally funded projects, the DOL’s Wage and Hour compliance office would ensure that companies are paying workers the correct prevailing wage rate under the Davis-Bacon Act and similar laws.

But because the cash is for private projects such as retrofitting commercial buildings to produce less greenhouse gasses or establishing privately owned green energy production facilities—not public projects—the Davis-Bacon Act doesn’t apply, even though the agency is using the wage rates set out under that law.

“I think that’s the fundamental difference is that it’s a tax credit and a tax provision, and therefore, tax turf is IRS turf,” said Nathan Oleson, a management side attorney at Akin Gump Strauss Hauer & Feld in Washington, D.C. “And so Treasury is the one that has been responsible not just for enforcement, but also for writing the guidance around this even though a lot of these issues tie back to Davis-Bacon and the prevailing wage rules.”

Oleson said that the government typically requires contract officers to monitor compliance with prevailing wage rules on federal contracting projects. Contractors also are required to submit certified weekly payroll reports proving they are paying the correct wages as well as a signed “Statement of Compliance” that the proper prevailing wage rate was paid, which are reviewed by the DOL.

“Here, it’s just a tax credit,” Oleson said in an interview. “Unless IRS or DOL wanted to build out that infrastructure and essentially have kind of an on-site site auditor available at all times, they just don’t have the bandwidth to monitor and do what a contracting officer would do in the typical Davis-Bacon context.”

‘Allergic to Unions’

Similarly, if the IRS finds that a company doesn’t meet the apprenticeship requirements after claiming the credit and doesn’t meet the good faith effort exception, the agency will levy a penalty of $50 times the total hours the requirement wasn’t met. That penalty increases to $500 times the noncompliant labor hours if the failure was found to be intentional, according to the guidance.

The Biden administration said that companies can partner with an already-established group’s registered apprenticeship program or register their own to comply with those requirements.

Employers typically must sign on to a group program’s agreement, which could create some collective bargaining requirements for non-unionized firms.

“People are starting to get their heads around what this really means,” said Elizabeth Crouse, a tax partner at K&L Gates. “I think it’s starting to be less scary and seem a little more achievable. It’s still scary in some parts of the country where this apprenticeship concept just isn’t very robust.”

“For better or for worse, a lot of people in the US, frankly, are allergic to unions,” Crouse added.

According to DOL data, 53% of the active apprentices in fiscal 2021 were participating in employer-run programs, which also outnumber programs run by employers and unions by nearly five times, the DOL data shows.

Employers also can sponsor their own apprenticeship programs and register them through the DOL or with one of the 31 states and jurisdictions that have set up their own apprenticeship agencies—a process that can be lengthy.

Jane Oates, who served as assistant secretary for the Employment and Training Administration during the Obama administration, said the time it takes to get a training program approved as a registered apprenticeship “really depends on how much prep work you’ve done before you talk to the DOL.”

Oates said it could take roughly “between one and three months” for a well-organized company to get a program registered.

“If you don’t have all those ducks in a row when you go, it could take much, much, much longer,” said Oates, who is now president of WorkingNation, a nonprofit focused on addressing challenges in the labor force.