The Inflation Reduction Act’s Penalty and Cure Provisions, along with recordkeeping requirements, outline the consequences for non-compliance with wage and apprenticeship standards, while providing pathways to rectify violations and ensuring thorough documentation for accountability. Click on the questions below to read the answer.
Even if the prevailing wage or apprenticeship requirements were not met during any period of the construction, alteration, or repair of a facility, the statute allows a taxpayer to still be eligible to get the increased credit or deduction amounts by making certain correction and penalty payments. A taxpayer will be deemed to satisfy the prevailing wage requirements if the taxpayer:
1. pays the affected laborers or mechanics the difference between what they were paid and the amount they were required to have been paid, plus interest at the Federal short-term rate (as defined in section 6621) plus 6 percentage points, and
2. pays a penalty to the IRS of $5,000 for each laborer or mechanic who was not paid at the prevailing wage rate in the year.
Under the final regulations, the penalty for failures concerning prevailing wages may not apply if the taxpayer quickly corrects certain limited errors or has a qualifying project labor agreement in place and timely corrects any failures to pay prevailing wages, as detailed in the final regulations. The amount a taxpayer must pay to the laborer or mechanic as well as the penalty to the IRS is increased if the failure is determined to be the result of intentional disregard.
To cure a failure to meet the apprenticeship requirements, a taxpayer must pay a penalty of $50 multiplied by the total labor hours for which the apprenticeship requirements were not met. The amount of the penalty with respect to the apprenticeship requirements is also increased to $500 per labor hour if the IRS determines the failure was due to intentional disregard. The penalty for failures concerning apprenticeship requirements may not apply if the taxpayer satisfies the Good Faith Effort Exception or has a qualifying project labor agreement in place.
The facts and circumstances that may be considered in determining whether a failure to satisfy the prevailing wage requirements is due to intentional disregard include (but are not limited to):
• Whether the failure was part of a pattern of conduct that includes repeated or systemic failures to ensure that the laborers and mechanics were paid wages are rates not less than the applicable prevailing wage rates, including failures to pay prevailing wages as required under other applicable laws;
• Whether the taxpayer took steps to determine or review the applicable classifications of laborers and mechanics, such as through a quarterly, or more frequent, review of the applicable classifications of laborers and mechanics according to the actual duties performed by those laborers and mechanics;
• Whether the taxpayer took steps to determine or review the applicable prevailing wage rate(s) for laborers and mechanics to ensure usage of correct rates by all contractors and subcontractors, such as through a quarterly, or more frequent, review of the prevailing wage rates;
• Whether the taxpayer promptly cured any failures to ensure that laborers and mechanics were paid wages at rates not less than the applicable prevailing rates;
• Whether the taxpayer has been required to make a penalty payment in previous years;
• Whether the taxpayer undertook a quarterly, or more frequent, review of wages paid to mechanics and laborers to ensure that wages at rates not less than the applicable prevailing wage rate were paid (including by reviewing payroll information of contractors and subcontractors or by requiring contractors and subcontractors to regularly provide payroll information to the taxpayer or a third party acting on behalf of the taxpayer);
• Whether the taxpayer included provisions in any contracts entered into with contractors that required the contractors and any subcontractors retained by the contractors to pay laborers and mechanics wages at rates not less than the prevailing wage rates and maintain records to ensure the taxpayer’s compliance with the recordkeeping requirements;
• Whether the taxpayer posted in a prominent place at the qualified facility or otherwise provided written notice to laborers and mechanics during the construction, alteration, or repair of the qualified facility: (i) of the applicable wage rate(s) as determined by the U.S. Department of Labor for all classifications of work to be performed for the construction, alteration, or repair of the facility, (ii) that in order to be eligible to claim certain tax benefits, employers must ensure that laborers and mechanics are paid wages at rates not less than such wage rates, and (iii) and instructions on how laborers and mechanics may contact the taxpayers’ personnel departments or taxpayers’ managers to report suspected failures to pay prevailing wages and/or suspected failures to classify workers in accordance with applicable wage determinations, employment tax violations, or violations of workplace standard laws without retaliation or adverse action;
• Whether laborers and mechanics were given the opportunity to acknowledge notice provided by the taxpayer, contractor, or subcontractor that in order to be eligible to claim certain tax benefits, taxpayers must ensure that laborers and mechanics employed by the taxpayer, contractor, or subcontractor in the construction of a qualified facility are paid wages at rates not less than prevailing wage rates;
• Whether the taxpayer had in place procedures whereby laborers and mechanics could report suspected failures to pay prevailing wages and/or suspected failures to classify workers in accordance with the wage determination of workers, employment tax violations, or violations of workplace standard laws to appropriate personnel departments or managers without retaliation or adverse action, and whether taxpayer investigated such reports by laborers and mechanics and had internal controls to prevent failures to pay prevailing wages and classify workers in accordance with the wage determination of workers, employment tax violations, and violations of workplace standard laws;
• Whether all laborers and mechanics were provided with a written notice of the rights conferred by the whistleblower provisions of the Taxpayer First Act;
• Whether all laborers and mechanics were provided with paystubs (or access to individual payroll records) reflecting the amount they were paid per pay period (including the specific hourly rate and all deductions from wages);
• Whether the taxpayer investigated any complaints of retaliation or adverse action resulting from, reports of suspected failures to pay prevailing wages and/or classify workers in accordance with applicable wage determinations, employment tax violations, or violations of workplace standard laws and took appropriate actions to remedy any retaliation or adverse action and prevent it from reoccurring;
• Whether the taxpayer, contractor, or subcontractor contracted with contractors who, at the time the work was performed, was known by the taxpayer, contractor, or subcontractor to be debarred by a municipality, state, or the U.S. Department of Labor for violations related to the underpayment of local, state, or federal prevailing wages; and
• Whether the taxpayer failed to maintain and preserve records sufficient to establish compliance with the prevailing wage requirements for relevant tax years.
The facts and circumstances that may be considered in determining whether a failure to satisfy the apprenticeship requirements is due to intentional disregard include (but are not limited to):
• Whether the failure was part of a pattern of conduct that includes repeated or systemic failures to ensure compliance with the apprenticeship requirements;
• Whether the taxpayer took steps to determine or review the applicable percentage of labor hours required to be performed by qualified apprentices;
• Whether the taxpayer sought to promptly cure any failures;
• Whether the taxpayer has been required to make a penalty payment under paragraph (f)(2) of this section in previous years;
• Whether the taxpayer included provisions in any contracts entered into with contractors that required the employment of qualified apprentices by the contractor and any subcontractors consistent with the labor hour requirement of section 45(b)(8)(A) and the participation requirement of section 45(b)(8)(C) and whether taxpayers regularly reviewed contractors’ and subcontractors’ use of qualified apprentices;
• Whether the taxpayer required contractors and subcontractors to forward to the taxpayer requests to registered apprenticeship programs within five business days of when requests were made;
• Whether the taxpayer made no attempt to comply with the Apprenticeship Requirements;
• Whether the taxpayer developed and used a plan to utilize qualified apprentices in the construction, alteration, or repair of the qualified facility;
• Whether the taxpayer, contractor, or subcontractor regularly followed up with registered apprenticeship programs regarding requests for qualified apprentices;
• Whether the taxpayer, contractor, or subcontractor contacted the Department of Labor’s Office of Apprenticeship or relevant State apprenticeship agency for assistance in locating a registered apprenticeship program;
• Whether the taxpayer had in place procedures whereby individuals could report suspected failures to comply with the Apprenticeship Requirements, without retaliation or adverse action, whether taxpayer investigated such reports by individuals, and whether the taxpayer had internal controls to prevent the failures to comply with the Apprenticeship Requirements;
• Whether the taxpayer investigated complaints of retaliation or adverse action resulting from reports of suspected failures to comply with the Apprenticeship Requirements, and took appropriate actions to remedy any retaliation or adverse action and prevent it from reoccurring; and
• Whether taxpayer failed to maintain and preserve records sufficient to establish compliance with the apprenticeship requirements for relevant tax years.
In general, the requirements to ensure payment of no less than the applicable prevailing wage rates and to satisfy the apprenticeship requirement applies to all taxpayers that claim an increased credit or deduction amount. Penalties for failures to pay prevailing wages may not apply if a taxpayer employs laborers, mechanics, and apprentices under a qualifying project labor agreement that meets certain requirements, and the taxpayer timely corrects the failure to pay prevailing wages. Penalties for failures to satisfy the apprenticeship requirements do not apply if the work is done pursuant to a qualifying project labor agreement that meets certain requirements.
Taxpayers are required to maintain and preserve sufficient records to establish compliance with the prevailing wage requirements. These records include payroll records for each laborer or mechanic (including each qualified apprentice) employed by the taxpayer, contractor, or subcontractor that reflect the hours worked in each classification and the actual wages and fringe benefits paid to each laborer and mechanic performing construction, alteration, or repair of the facility. In addition to payroll records otherwise maintained by the taxpayer, records sufficient to demonstrate compliance may include, but are not limited to, identifying information (including addresses, telephone numbers, and email addresses) for laborers and mechanics, the location and type of facility, the labor classification(s) applied to each laborer and mechanic, the applicable wage determination(s), copies of executed contracts for construction, alteration, or repair with any contractor or subcontractor, and records to support contributions to bona fide fringe benefit programs. If work is done pursuant to a qualifying project labor agreement, the taxpayer must also maintain and preserve records related to that qualifying project labor agreement. Taxpayers are also required to maintain records of any correction payments made to any laborer or mechanic.
Taxpayers are also required to maintain and preserve records to establish compliance with the apprenticeship requirements. These records may include copies of any written requests for apprentices by the taxpayer, contractor, or subcontractor, any agreement entered by the taxpayer (or contractor or subcontractor) with a registered apprenticeship program, records reflecting the required ratio of apprentices to journeyworkers prescribed by each registered apprenticeship program from which qualified apprentices are employed, and records reflecting the daily ratio of apprentices to journeyworkers.
Taxpayers may satisfy the recordkeeping requirements in any of the following ways:
1. Taxpayers may collect and physically retain relevant records from every contractor and subcontractor. The records may have personally identifiable information (PII) redacted to comply with applicable privacy laws.
2. Taxpayers, contractors, and subcontractors may provide relevant records to a third-party vendor to physically retain on behalf of the taxpayer. The records may have PII redacted to comply with applicable privacy laws.
3. Taxpayers, contractors, and subcontractors may each physically retain the relevant unredacted records for their own employees.
Under all three alternatives, taxpayers will be required to make unredacted records available to the IRS upon request.
