The Internal Revenue Service needs to strengthen its processes to ensure compliance with the requirements for receiving the Qualifying Advanced Energy Project Credit, according to a new government report.
The report, released Wednesday by the Treasury Inspector General for Tax Administration, identified 1,149 individual taxpayers who claimed more than $3 million in Advanced Energy Credits for tax year 2011 but did not appear to have a business relationship with a manufacturer that was awarded the credit.
The American Recovery and Reinvestment Act of 2009 established the Advanced Energy Credit to encourage development of a manufacturing base to support renewable energy industries. The Recovery Act authorized $2.3 billion in Advanced Energy Credits to be allocated to manufacturers for qualified projects.
For the report, TIGTA assessed the effectiveness of IRS efforts to ensure manufacturer compliance with Advanced Energy Credit requirements. TIGTA generally found that the IRS ensured that manufacturers complied with agreement and certification requirements. For those projects that did not meet the requirements, TIGTA acknowledged that the IRS appropriately considered the credits allocated to the project as forfeited, issued forfeit letters to the manufacturers, and accounted for the $150 million in Advanced Energy Credits allocated to those projects.
However, while the IRS developed a Compliance Initiative Project that identified business taxpayers who were erroneously claiming the credit, it does not have a similar process to identify individual taxpayers who are erroneously claiming it. TIGTA found 1,149 individual taxpayers who claimed more than $3 million in Advanced Energy Credits for 2011 but did not seem to have a business relationship with a manufacturer that was awarded the credit.
TIGTA also found that the IRS did not consistently evaluate project location changes to determine if the changes were significant enough to warrant credit forfeiture. Geographic diversity and regional economic development were two of the four criteria used by the Energy Department in awarding the credits. In addition, the IRS does not have procedures to verify whether manufacturers are reporting significant changes in product plans.
“Processes to identify and evaluate significant changes to projects, such as the project’s location, are essential to determine whether the manufacturer changes are significant enough to result in the forfeiture of the credit,” said TIGTA Inspector General J. Russell George in a statement. “While the IRS established processes to ensure manufacturer compliance with requirements for receiving the Advanced Energy Credit, these processes can be strengthened to ensure that only eligible manufacturers receive the credit.”
TIGTA recommended that the IRS develop processes to ensure that changes in projects are fully evaluated and that all projects are placed into service at the locations specified in the manufacturers’ agreement. In addition, the IRS should develop a process to verify that individuals claiming the Advanced Energy Credit are entitled to the credit, TIGTA suggested. The IRS agreed with TIGTA’s recommendations and is planning to take appropriate action. The IRS agreed to ensure that changes in projects are fully evaluated and that all projects are placed into service at the locations specified in the manufacturer’s agreement. The IRS also agreed to evaluate and assess individual taxpayer compliance risks and determine if a compliance strategy is warranted based on its assessment of individual taxpayer compliance risks.
The report also recommended that the IRS verify whether the 1,149 individual taxpayers who were identified as not related to the manufacturer of an advanced energy project are entitled to receive the tax credits, but the IRS said it would not be going after all of them.
“IRS did not agree to verify each of the 1,149 individual taxpayers identified by TIGTA, as our analysis of this population shows that the credits claimed are not equally distributed,” wrote Heather C. Maloy, commissioner of the IRS’s Large Business and International Division, in response to the report. “For example, of the 1,149 individual taxpayers identified by TIGTA, 168 claimed credits of roughly $28 million while the remaining majority of individual taxpayers claimed credits of approximately $263,000. The IRS agrees to consider this population, make an appropriate risk assessment, and determine those specific taxpayers to pursue.”