IRS Can’t Tell Who Deserves Energy Tax Credits

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The Internal Revenue Service cannot determine whether taxpayers claiming Residential Energy Credits are actually entitled to them, according to a new government report that found the tax credits going to hundreds of prisoners and minors.

The report, from the Treasury Inspector General for Tax Administration, noted that the American Recovery and Reinvestment Act of 2009 modified the law related to energy credits to encourage the purchase of energy-efficient property and renewable sources of energy for home use. More than 6.8 million individuals claimed more than $5.8 billion in Residential Energy Credits on tax year 2009 tax returns processed through December 31, 2010.

However, the IRS does not require individuals to provide any third-party documentation to support the purchase of qualifying home improvement products and/or costs associated with making energy efficiency improvements and whether these qualified improvements were made to their principal residences.

Based on a review of a statistically valid sample of 150 tax returns, TIGTA was unable to confirm homeownership for 45 (30 percent) of the taxpayers. Homeownership is required to claim Residential Energy Credits.

In addition, TIGTA identified 362 ineligible individuals who were allowed to erroneously claim $404,578 in Residential Energy Credits on their tax returns. These individuals, including 262 prisoners and 100 individuals under the age of 18, were allowed to erroneously claim these credits because the IRS did not develop a process to identify prisoners or individuals who are too young to buy a home. The IRS has data that could have been used to identify these erroneous credits.

TIGTA assessed the effectiveness of the IRS’s process to identify erroneous Residential Energy Credits, as part of its statutory requirement to monitor the IRS’s implementation of the Recovery Act.

“Federal agencies are required to ensure that Recovery Act funds are used for authorized purposes and that appropriate measures are taken to prevent waste, fraud, and abuse,” said TIGTA Inspector General J. Russell George in a statement. “I am troubled by the IRS’s continued failure to develop appropriate verification methods for distributing Recovery Act credits.”

TIGTA recommended that the IRS revise the Form 5695, Residential Energy Credits, to request specific information supporting key eligibility requirements to verify that requirements were met; and examine the tax returns of the 362 individuals TIGTA identified as being in prison or underage to ensure these individuals qualify for the Residential Energy Credits. The report also recommended that the IRS implement processes to identify and review tax returns filed by prisoners or underage individuals to ensure they qualify for Residential Energy Credits claimed.

The IRS agreed with the first and third recommendations and plans to take corrective actions. The IRS partially agreed with the second recommendation. Specifically, the IRS agreed to review the returns of the 362 individuals identified as being in prison or underage and plans to audit those tax returns that warrant further examination.

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Tax practice