July 24, 2024

On Wednesday, the Internal Revenue Service (IRS) issued a cautionary note to taxpayers. It warned of a new kind of scam which involved the buying of clean energy tax credits.

The IRS noted a few incidents where untruthful tax preparers manipulated the guidelines for obtaining clean energy tax credits as per the Inflation Reduction Act of 2022. The act includes transferability clauses that let taxpayers buy tax credits from clean energy investments to decrease their tax obligation. However, some dishonest tax preparers trick their clients into submitting returns that state they have purchased clean energy credits. But, these taxpayers cannot derive any benefit from the claim.

Form 1040 filers are the primary targets for this scam. These tax preparers submit returns which erroneously claim IRA credits to offset their clients’ income tax from wages, Social Security, and retirement account drawdowns.

The IRS emphasized that tax credits bought under the IRA are susceptible to passive activity rules. Taxpayers can usually use these purchased credits to offset the tax on income from a passive activity. However, the majority of taxpayers lack passive income and a related tax obligation. Most investment activities are not seen as passive.

IRS Commissioner Danny Werfel stated on Wednesday, “This is yet another instance where tricksters are taking advantage of the tax law’s complexity to bait people into claiming credits they don’t qualify for. Taxpayers should stay away from these suspect credits and others like them. The IRS has its eye on scams like this and we advise people to consult a reliable tax professional before claiming intricate credits like clean energy ones.”

IRS Commissioner Danny Werfel offering a talk at American University’s Kogod School of Business

The IRS said that individual taxpayers who incorrectly claim these credits could face future action by the IRS. They are liable to return the exaggerated credit including interest and potential penalties.

On a related note, earlier on Wednesday, the IRS introduced reporting relief for businesses that claim tax credits for renewable energy and electricity initiatives. The businesses have a faster way to report hundreds of these credits for 2023 using Forms 3468 and 8835.

Frequently asked questions

What is the clean energy tax credit scam?

The clean energy tax credit scam is a fraudulent activity where deceptive tax preparers manipulate the rules to claim clean energy tax credits. These preparers convince taxpayers to submit returns that falsely claim the purchase of clean energy credits, which the taxpayers ultimately aren’t able to reap any benefits from.

Who are the primary targets of this scam?

The main targets are the individuals who submit Form 1040. Dishonest tax preparers file returns for these individuals, falsely claiming IRA credits to offset the taxpayers’ income taxes.

What are the potential consequences for individuals claiming inappropriate credits?

Individual taxpayers who wrongfully claim these credits could be subjected to future compliance measures by the IRS. They would also be held liable for refunding the exaggerated credit, with potential interest and penalties added on top.