This is a request for reader feedback on an issue related to the HIRE Act worker retention tax credit that many employers are claiming with their 2011 federal income tax returns.
Question: Has anyone filed IRS Form 8886 “Reportable Transaction Disclosure Statement” (or had any related experience) in connection with service fees for the HIRE Act new hire retention tax credit program?
Some Background: Per the instruction to IRS Form 8886, some tax transactions that involve the payment of a contingency fee (aka “contractual protection”) must be disclosed to the IRS. In non-technical terms, this is when someone claims a federal income tax benefit for which they also pay a service fee that is based on the amount of the tax benefit.
This kind of service fee, however, is very common when it comes to employment-based tax credit programs like the Work Opportunity Tax Credit, Empowerment Zone Employment Credit, the Indian Employment Tax Credit, and others. Employers usually require help with these programs and prefer to pay for that help based on the level of results achieved by their service provider.
Recognizing this, the IRS has specifically exempted WOTC, Empowerment Zones and six other programs from the disclosure requirement. See IRS Rev Proc 2007-20 (http://www.irs.gov/irb/2007-07_IRB/ar15.html).
The HIRE Act new hire retention tax credit is very similar in principle and procedure to the excluded programs. However, it was a one-time program only affecting employees hired in 2010. To date, we have not found an updated IRS statement excluding it from the reporting requirement.
If you have come across information about this issue, we would like to hear from you.