State AGs Note Potential Enforcement Abuses Under Energy Credit Regs

October 30, 2023

The Honorable Lily Batchelder
Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Thomas West, Jr.
Deputy Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

The Honorable Danny Werfel
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

William Paul
Acting Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Notice of Proposed Rulemaking: Increased Credit or Deduction Amounts for Satisfying Certain Prevailing Wage and Registered Apprenticeship Requirements (IRS REG–100908–23)

The Attorneys General of Illinois, Colorado, Connecticut, Delaware, the District of Columbia, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, Oregon, and Pennsylvania (collectively, the States) submit these comments in response to the Department of the Treasury (Treasury) and the Internal Revenue Service's (the IRS) Notice of Proposed Rulemaking on Increased Credit or Deduction Amounts for Satisfying Certain Prevailing Wage and Registered Apprenticeship Requirements, IRS REG–100903–23, 88 Fed. Reg. 60,018 (Aug. 30, 2023).

The Inflation Reduction Act (IRA) presents a historic opportunity to curb dangerous greenhouse gas emissions and create high-road careers in an equitable green economy. Many of the States previously commented on IRS Notice 2022–51 in support of fair and effective implementation of the IRA to achieve these twin aims.¹ As we have previously explained, the increased tax credits conditioned on satisfying prevailing wage and apprenticeship requirements are a key policy for accomplishing these goals. The States comment to raise their significant concern that the enforcement of the requirements, as currently envisioned, could allow abuse of the enhanced credits that will undermine the aims of the IRA. The States believe that a more thorough collaboration among Treasury, the IRS, and the Wage and Hour Division of the Department of Labor (WHD) would better promote full compliance with these important provisions.

I. Effective prevailing wage and apprenticeship compliance depends on fact-specific investigations conducted while the covered work is ongoing.

The States' experiences confirm that effective prevailing wage compliance depends on enforcement agencies with boots on the ground — not only WHD but also state and local labor enforcers. Under state and local laws in many jurisdictions, contractors engaged in public works must pay state-mandated prevailing wage rates, submit certified payroll records to the contracting government agency, and maintain those records for specified periods of time. For example, in New York, government contractors and subcontractors must pay the prevailing wage to all workers under a public works contract. Contractors must submit certified payroll records demonstrating compliance to the government agency that contracts for the work, and those payroll records must be stored on site during the project and with the contracting agency for three years after the project is completed.² Some jurisdictions require government contractors to use specific software to submit certified payroll records. ³ Prevailing wage and apprenticeship enforcement occurs both in response to complaints and also proactively. Investigators will typically visit the job site, review the certified payroll records on site, interview workers, and take other affirmative steps to uncover violations in real time.

As enforcers of worker protection laws, including state prevailing wage requirements, the States have first-hand experience with complex schemes to circumvent these protections. And we have found that on-the-ground, contemporaneous investigations are needed because paper records alone often do not reveal violations. Indeed, it is all too common for employers and contractors to submit certified payroll records that on their face appear to comply with prevailing wage requirements while concealing that workers were paid off the books at non-prevailing rates of pay or were required to “kick back,” or pay back, part of their paychecks to their employers. While far from exhaustive, the following examples present some of the typical fact patterns that the States encounter in their work:

• In Illinois, the Attorney General sued a construction company over an elaborate scheme to keep its employees off payroll. Drive Construction, Inc., obtained contracts for public works projects, such as schools and public housing apartments, worth nearly $40 million over several years. The contracts required Drive to pay its carpenters at mandated prevailing wages. But the Illinois Attorney General has alleged that Drive paid workers in cash, off the books, for thousands of hours of labor at rates well below the prevailing wage rates. Drive initially was able to conceal the off-the-books hours by funneling money through two layers of sham subcontractors, but an on-the-ground investigation revealed the unlawful conduct.⁴

• In Massachusetts, the Attorney General sued a construction management firm for submitting fraudulent payroll records to conceal that workers on multiple public projects were not being paid prevailing wages. After a tip from a labor union, the Massachusetts Attorney General investigated and uncovered that workers were being underpaid by more than $35 per hour. A simple review of the falsified certified payroll records would not have revealed this practice.⁵

• In New York, a property developer took advantage of a tax credit conditioned on the payment of prevailing wages to building service employees but then paid workers less than half of what they were due. The New York Attorney General was able to recover $3 million in back wages to the workers and penalties to the government. A tip from a labor union again brought the issue to the Attorney General's attention.⁶

• In Oregon, the owner of a building contracting company pleaded guilty under racketeering laws to a sprawling scheme that involved forcing workers on prevailing wage contracts to return large percentages of their paychecks to him.⁷

• In New Jersey, a contractor who was legally barred from prevailing wage work because of past violations used a new business entity to obtain a public subcontract worth $400,000 to provide masonry work for a student housing project. The contractor paid most of his employees only a fraction of the prevailing wages they were entitled to be paid, while not paying others at all. To cover up the violations, he submitted certified payroll records containing false information to the general contractor on a weekly basis. In addition to producing false records, he instructed several employees to provide false information to a state investigator regarding the wages they were receiving.⁸

As the above examples show, low-road employers can and do falsify payroll records in order to evade legally required prevailing wages. In such cases, a paper audit alone can fail to reveal the scope of the legal violations — or even their existence. Instead, the States rely on combining certified payroll records with information from whistleblowers, interviews with workers, and investigative subpoenas to third parties with relevant information. Whistleblowers often include workers, advocacy organizations, and labor unions with related work at the site. Enforcement agencies with boots on the ground can build the necessary relationships to do this work. By the same token, finding and addressing violations is far more achievable when a project is ongoing. Workers are present in one location; enforcement agencies can use tools like confidential informants or surveillance; contractors and foremen are available to be interviewed; short-lived records like sign-in sheets remain available for review. None of this is possible during a paper audit conducted years after the fact.

II. The purely retrospective enforcement regime contemplated by the proposed rule risks serious compliance and enforcement failures.

The proposed rule, in contrast to the on-the-ground enforcement investigations described above, contemplates a purely retrospective compliance regime that would not enable any real-time, affirmative enforcement efforts. The recordkeeping provisions found in Proposed §1.45–12 require only the preservation of relevant documents rather than any affirmative disclosure of them while the work is ongoing. Treasury and the IRS take the position that “because the increased credit is not claimed until the time of filing a return, which will only occur after a qualified facility is placed in service, the proposed regulations would not adopt the Copeland Act requirement to report payroll records to the IRS on a weekly basis in advance of claiming an increased credit.” 88 Fed. Reg. at 60,035. But this time delay only highlights the need for more affirmative compliance measures. Enhanced credits will often be claimed months or even years after much of the work has been performed. Under the proposed rule, during this entire time period, no one — except the taxpayer — would have any knowledge at all that the taxpayer was supposed to be paying prevailing wages.

Therefore, the records required to be kept under Proposed §1.45–12 and the IRS form that will be required to retroactively claim the credit will not provide opportunity for adequate enforcement. As discussed in the previous section of this comment, many prevailing wage investigations start with a tip from a whistleblower while work is ongoing. That whistleblower is often a worker at the site or a labor union approached by a worker. Apprised of the possible violations, state agencies are then able to look beyond the paper records to other sources of information concerning the violations. Similar enforcement actions would simply not be possible under the current proposed rule. The likely result is that many taxpayers could claim the enhanced credits unlawfully and yet never be detected.

Finally, the States want to make clear that the IRS will not be able to refer to any list or database at the state or local level providing comprehensive information about a contractor's compliance with prevailing wage laws. Despite the robust enforcement programs set up by state and local governments, no such centralized databases exist. Rather, state and local enforcement agencies determine compliance through targeted enforcement against specific falsifications in certified payroll records. Thus, unless Treasury and the IRS implement contemporaneous notice and reporting requirements, there will be no way for the federal government or any other interested party to bring violations to light.

III. A more robust compliance regime should mandate contemporaneous notice to workers and the inclusion of Davis-Bacon contract provisions.

The States present several proposals for improvement on the proposed rule's compliance regime. At a minimum, effective compliance requires that the workers themselves know that they are supposed to be receiving prevailing wages, in other words that their employer intends ultimately to claim the increased tax credits under 26 U.S.C. §45(b)(7) or a related provision. The proposed rule already includes a measure on posting and notice to workers: Proposed §1.45–7(c)(3)(iii)(H) provides that appropriate notice to workers weighs against a finding that there was intentional disregard of the prevailing wage requirements. 88 Fed. Reg. at 60,044. The States support this practice and largely agree with the content of Proposed §1.45–7(c)(3)(iii)(H). The States comment, however, that appropriate posting and notice to workers should not be only a factor as to intentional disregard; rather, it should be a universal requirement to claim the increased tax credits and deductions.

In addition to being made mandatory, Proposed §1.45–7(c)(3)(iii)(H) should also be improved in certain respects. Specifically, the language should make clear that such posting or notice must be made, at the latest, at the time that the construction, alteration, or repair begins. The current language leaves the timing of posting and notice ambiguous. The analogous Massachusetts statute, for instance, requires that the posting be up “during the life of the contract.” Mass. Gen. Laws ch. 149, §27. Furthermore, an improved Proposed §1.45–7(c)(3)(iii)(H) should specify that the written notice must be delivered along with the worker's paycheck or similar remittance to ensure that the worker receives actual notice.

Another best practice already found in the proposed rule's intentional disregard factors is whether the taxpayer included prevailing wage and apprenticeship provisions in its contracts. See Proposed §1.45–7(c)(3)(iii)(G), 88 Fed. Reg. at 60,044; Proposed §1.45–8(e)(2)(ii)(C)(5), 88 Fed. Reg. at 60,050. Regulations promulgated under the Davis-Bacon Act (DBA), 40 U.S.C. §3141 et seq., detail the standard contract provisions, which can be readily applied in this context as well. See 29 C.F.R. §§3.11, 5.5. Here again, the rule should make contractual compliance a universal requirement rather than merely a factor for intentional disregard. In many situations, workers, labor organizations, and state-level enforcers will be able to obtain the contracts for important projects, thereby aiding in the identification of taxpayers intending to claim the enhanced credits and deductions.

IV. An inter-agency collaboration between the IRS and WHD would enable contemporaneous monitoring of prevailing wage and apprenticeship compliance.

More broadly, the States urge Treasury and the IRS to set up an inter-agency collaboration with WHD to facilitate the receipt of more robust contemporaneous reporting from taxpayers intending to claim the increased credits. This collaboration would likely need to be formalized through a memorandum of understanding or similar document. But the expertise and capabilities of WHD would vastly improve prevailing wage and apprenticeship compliance in connection with the IRA's enhanced credits.

For example, as discussed above, the lack of any required disclosure to Treasury and the IRS until the moment when the taxpayer claims the credit or deduction will severely undermine compliance. The States recognize that the IRS may lack the capacity or subject-matter expertise to receive and review typical DBA reporting. Cf. 88 Fed. Reg. at 60,035 (stating that weekly reporting to the IRS would not assist the IRS in administering the provision). WHD, however, does have the relevant subject-matter expertise and would be a more appropriate recipient for contemporaneous reporting from taxpayers intending to claim the increased credits or deductions.

Accordingly, the States comment that Treasury and the IRS should require all contractors and taxpayers intending to seek prevailing wage and apprenticeship enhancements to file a statement of intent with WHD at the time that the work begins. The statement of intent would convey a future intent to claim an enhanced tax credit for purposes of facilitating compliance throughout the life of the project. The statement would contain basic information about the project such as the location and type of qualified facility, the anticipated wage determinations for the type and location of the facility, and an estimate of the total labor hours for the construction, alteration, or repair by any laborer or mechanic employed by the taxpayer or any contractor or subcontractor. Cf. 88 Fed. Reg. at 60,035 (setting forth the information likely to be required for claiming increased credits at the time a tax return is filed).

Furthermore, as part of its inter-agency collaboration with the IRS, WHD should publicly disclose the statements of intent filed with WHD through its website. Public disclosure would enable interested parties — including workers, labor organizations, and state and local enforcers — to monitor prevailing wage projects and to report possible violations. Without this, states and other law enforcement entities will have no idea which companies intend to claim or have claimed the enhanced credits and will be unable to target their own enforcement appropriately.

Allowing the public to view disclosures submitted to WHD would not violate tax confidentiality because such information would not be “received by, recorded by, prepared by, furnished to, or collected by the Secretary.” 26 U.S.C. §6103(b)(2); see Lomont v. O'Neill, 285 F.3d 9, 14–15 (D.C. Cir. 2002) (holding that disclosure of tax-related information submitted to local law enforcement agencies did not violate §6103 because it was not initially sent to the IRS and thus did not fall under the statutory prohibition); Stokwitz v. United States, 831 F.2d 893, 895–96 (9th Cir. 1987) (“[T]he statutory definitions of 'return' and 'return information' to which the entire statute relates, confine the statute's coverage to information that is passed through the IRS.”). Making the universe of potentially covered projects available to third-party enforcers is crucially important because, as noted above, a paper review may not always reveal prevailing wage and apprenticeship violations.

Treasury and the IRS should also require, as the work is performed, the filing of certified payroll records covering each week of the period for which the taxpayer intends to claim enhanced benefits. The certified payroll records could also be directed to WHD rather than the IRS as part of the inter-agency collaboration to facilitate compliance. WHD regulations and the Federal Acquisition Regulation (FAR) already describe certified payroll record requirements in detail. See 29 C.F.R. §§3.3–.4; FAR 52.222–8(b)(1). Certified payroll records must be accompanied by a signed statement certifying under penalty of perjury that the information contained within the certified payroll records is accurate. See 29 C.F.R. §5.5(a)(3)(ii)(B)–(D); FAR 52.222–8(b)(2)-(4). As to apprenticeship requirements, the States also suggest requiring contractors to include apprentice identification cards from a registered apprentice program alongside certified payroll records to deter contractors from claiming new or inexperienced workers as qualified apprentices.⁹

Contemporaneous reporting of certified payroll records, submitted under penalty of perjury, has incalculable benefits for long-term compliance with prevailing wage and apprenticeship requirements. The requirement to regularly certify correct payroll deters violators and also makes it more difficult to invent falsified payroll after the fact. It also allows law enforcement agencies to review records in real time and spot potential violations while memories are still fresh. Even for taxpayers who might unlawfully claim enhanced credits despite the requirement, the submission of the false statements gives rise to additional legal violations and thereby facilitates enforcement. In particularly egregious cases, false certified payroll records can create criminal liability. See, e.g., United States v. Estepa, 998 F.3d 898, 900 (11th Cir. 2021). Needless to say, that possibility carries a powerful deterrent effect.

V. Treasury and the IRS may impose the above requirements consistent with their statutory authority and sound tax administration.

The Notice of Proposed Rulemaking asserts that, because the prevailing wage and apprenticeship requirements become binding only once a tax return claiming the increased credit is filed, it “would not assist the IRS” to implement contemporaneous reporting requirements like those discussed in the previous section. 88 Fed. Reg. at 60,035. Treasury and the IRS thus do not take the position that they lack legal authority to impose contemporaneous reporting requirements as a condition of the enhanced credits. Indeed, the grant of authority in §45(b)(12) clearly encompasses such requirements. Treasury and the IRS are empowered to issue any regulations that “the Secretary determines necessary to carry out the purposes of” the IRA, including “information reporting for purposes of administering the requirements.” 26 U.S.C. §45(b)(12). The D.C. Circuit has summarized another statute with the same wording as “broad language” that “left it to the Secretary to determine which regulations were 'necessary.'” FORMULA v. Heckler, 779 F.2d 743, 757 (D.C. Cir. 1985).

The sole question, then, is whether a collaboration with WHD to implement contemporaneous reporting would further “sound tax administration,” a consideration repeatedly emphasized by Treasury and the IRS. 88 Fed. Reg. at 60,022. Contrary to the proposed rule's conclusory assertion, however, contemporaneous reporting through partnership with an expert agency would further sound tax administration. The foremost reason, as already discussed above, is that contemporaneous reporting would discourage improper claims of enhanced credits and deductions, a key goal for any IRS rulemaking.

In addition, sound tax administration, as an IRS official recently noted in a law review article, embraces (1) legal certainty and (2) consistent treatment of similarly situated taxpayers.¹⁰ Contemporaneous reporting of certified payroll records would also further these important goals. Contemporaneous reporting to WHD will enable an expert agency to identify potential compliance issues that could arise in this novel context up front, potentially years before the enhanced credit is ultimately claimed. Taxpayers will then have the opportunity to seek guidance from WHD, Treasury, and the IRS as issues arise. For the same reason, contemporaneous reporting will ensure that similarly situated taxpayers are treated alike. Implementing the normal DBA reporting requirements will promote uniformity across taxpayers claiming the enhanced credits, some of whom may not already be familiar with the DBA process if they have not worked on covered projects in the past.

The §48(e) low-income communities bonus credit program and the §48C(e) qualifying advanced energy project program both provide analogous models and support the States' views. Treasury and the IRS implemented both these IRA credits by partnering with the Department of Energy (DOE) to help review potential projects and vet them for compliance with statutory goals. See Additional Guidance on Low-Income Communities Bonus Credit Program, 88 Fed. Reg. 55,506 (Aug. 15, 2023); Additional Guidance for the Qualifying Advanced Energy Project Credit Allocation Program Under Section 48C(e), Notice 2023–44, 2023–25 I.R.B. 924 (June 30, 2023). Both examples show how prior disclosure to an expert agency, rather than merely retrospective recordkeeping, furthers sound tax administration. The DOE has more subject-area knowledge than the IRS concerning renewable energy and advanced energy projects, warranting DOE's review of taxpayers' submissions on the front end. The States suggest that the IRS should enter into a similar collaboration with WHD to help monitor compliance with prevailing wage and apprenticeship requirements.

In fact, with regard to the §48C(e) credit, Treasury and the IRS already require the taxpayer to notify DOE that the taxpayer intends to satisfy prevailing wage requirements as part of the taxpayer's initial application. See Initial Guidance Establishing Qualifying Advanced Energy Project Credit Allocation Program Under Section 48C(e), Notice 2023–18, 2023–10 I.R.B. 508, §5.07 (Mar. 6, 2023). This fact is also noted in the Notice of Proposed Rulemaking here. See 80 Fed. Reg. at 60,034. So, under the proposed rule, only taxpayers claiming the §48C(e) credit with a prevailing wage enhancement — but none of the other IRA prevailing wage enhancements — will need to affirmatively disclose their intention to do so. This example shows, first, that prior disclosure is possible and desirable. It also shows that, unless Treasury and the IRS impose similar requirements with respect to the other IRA enhanced credits, similarly situated taxpayers will be treated differently. To promote sound tax administration and avoid this inequity, all the prevailing wage and apprenticeship enhanced credits and deductions should require affirmative, contemporaneous disclosure and reporting by taxpayers.

VI. Conclusion

The States appreciate the opportunity to provide these recommendations to ensure fair and effective implementation of the IRA.

Respectfully submitted,

THE STATE OF ILLINOIS
KWAME RAOUL,
Attorney General of Illinois

THE STATE OF MAINE
AARON M. FREY,
Attorney General of Maine

THE STATE OF CONNECTICUT
WILLIAM TONG,
Attorney General of Connecticut

THE STATE OF MARYLAND
ANTHONY G. BROWN,
Attorney General of Maryland

THE STATE OF COLORADO
PHILIP J. WEISER,
Attorney General of Colorado

THE COMMONWEALTH OF MASSACHUSETTS
ANDREA JOY CAMPBELL,
Attorney General of Massachusetts

THE STATE OF DELAWARE
KATHLEEN JENNINGS,
Attorney General of Delaware

THE STATE OF MICHIGAN
DANA NESSEL,
Attorney General of Michigan

THE DISTRICT OF COLUMBIA
BRIAN SCHWALB,
Attorney General of the District of Columbia

THE STATE OF MINNESOTA
KEITH ELLISON,
Attorney General of Minnesota

THE STATE OF NEW JERSEY
MATTHEW J. PLATKIN,
Attorney General of New Jersey

THE STATE OF OREGON
ELLEN F. ROSENBLUM,
Attorney General of Oregon

THE STATE OF NEW YORK
LETITIA JAMES,
Attorney General of New York

THE COMMONWEALTH OF PENNSYLVANIA
MICHELLE A. HENRY,
Attorney General of Pennsylvania