Using the U.S. Tax Code to promote green energy is a policy strategy that Congress has used for decades. However, the Inflation Reduction Act (IRA) of 2022 increased the popularity of green energy tax credits. Unfortunately, given their complexity, many taxpayers have mistakenly claimed these credits or received bigger credits than they should have.
To combat these types of problems, the IRS relies on audits to verify taxpayers’ claims on their tax returns. With the IRA now a few years old, the timing is right for the IRS to ramp up its clean energy tax credit audit efforts. Expected areas of tax audit focus include improper transfer of green tax credits, overstated costs, misused credits, and ineligible projects.
Key Takeaways
- Green energy tax credits – focused on green energy production, clean vehicles, and the manufacturing of clean energy equipment.
- Audit risk – The IRS may audit these credits at high rates because they’re complex and prone to fraudulent claims.
- Protect yourself – consult with a tax professional when facing a clean energy tax credit audit is recommended.
High-Risk Green Energy Tax Credits
The 2022 Inflation Reduction Act (IRA) affected dozens of clean energy tax credits, but not all of them are at the same risk of being audited. That being said, if you claimed an energy tax credit on the following list (most of which can be found in Sections 45 and 48 of the Internal Revenue Code), you may have a higher chance of getting audited.
- Investment Tax Credit (ITC): These include many green energy tax credits, many of which are primarily claimed by business taxpayers. Audit risks stem from incomplete projects, overestimated project costs, and misused bonus credits.
- Advanced Energy Project Credit: This credit is for businesses that invest in advanced energy projects. During audits, the IRS often looks for tax credits being used for non-qualifying energy production facilities.
- Commercial Clean Vehicle Credit: Taxpayers who purchase a qualified commercial clean vehicle for business use can utilize this credit. Errors can exist when taxpayers improperly combine this credit with other credits or by misclassifying vehicles.
- Production Tax Credit (PTC): This tax credit goes to power producers that generate electricity using qualified renewable energy sources. Potential audit issues include over-reported energy production numbers and claiming this tax credit along with the ITC.
- Clean Hydrogen Tax Credit: Producers of clean hydrogen may receive a tax credit of up to $3.00/kg of clean hydrogen generated without producing too much carbon dioxide. Audit risks may arise if incorrect information is provided concerning carbon dioxide creation or eligibility requirements.
- Advanced Manufacturing Production Credit: Sellers and producers of clean energy generation components and equipment may be eligible for this credit. Potential issues can arise if taxpayers overreport production numbers or don’t meet the domestic production requirements.
- Clean Fuel Production Credit: This is an income tax credit for domestic producers of clean transportation fuel. The IRS needs to make sure that taxpayers don’t inflate production volumes or misstate their carbon dioxide equivalent values.
- Clean Energy Investment Credit: To receive this credit, taxpayers must have a qualified facility and energy storage technology in operation after December 31, 2024. Audit problems could arise if wage, apprenticeship, or domestic content requirements aren’t met.
- Carbon Sequestration Credit: This tax credit is designed to help mitigate the cost of carbon management projects that capture carbon emissions from the atmosphere and certain energy production facilities. A common problem with this tax credit exists where taxpayers don’t accurately report the effectiveness of their carbon capture technology.
- Alternative Fuel Vehicle Refueling Credit: This credit is available to individuals or businesses that install eligible refueling or electric charging equipment at their home or business. A common audit error may include misreporting eligible locations for otherwise eligible installations.
- Bonus Credits: Some of the clean energy tax credits offer bonuses if certain conditions are met, such as project locations and worker pay requirements. If these requirements aren’t met, the IRS may reduce the value of the credit following the audit.
Preparing for Clean Energy Tax Credit Audit
That doesn’t mean an audit is inevitable if you’ve claimed one or more of the above credits. In some cases, you may have an early warning about a potential audit. For instance, there are “soft notices” that the IRS may send you before officially notifying you of an audit. An example is the CP99A notice, which asks you about a clean vehicle purchase you made where the IRS believes you chose to transfer the clean vehicle credit to the dealer.
Appropriately responding to these early notices might help avoid an audit. But for situations where you never receive a soft notice or your perfectly crafted response still results in an audit, there are things you can do to make the audit process go as smoothly and favorably as possible:
- Carefully review the letter or notice from the IRS informing you of the audit. This seems obvious, but many taxpayers provide more information than requested by the IRS. Not only does this waste your time, but it could result in the IRS investigating an issue they didn’t know about until you provided them with information they didn’t ask for.
- Before responding to the IRS, make sure you fully understand the scope of the audit. In other words, before giving the IRS any information or telling them anything, you should know why the IRS is asking for a particular piece of information.
- Double-check the accuracy of your documentation. This includes ensuring that the arithmetic is accurate and that these documents confirm tax credit eligibility and don’t contradict other information given to the IRS.
- Prepare to explain discrepancies. If you find a potential discrepancy between your documentation and what you’ve already claimed with the IRS, be ready to explain why.
- Work promptly to provide the IRS with the requested information. But also don’t rush things or fail to miss a deadline because finding the information proved more difficult than anticipated. If you need more time, contact the person handling your audit (most likely a revenue agent) and tell them how much more time you need and why.
- Reconstruct records if needed. If you can’t find a necessary document, you’re allowed to recreate that record using information from other sources.
- Be as organized as possible with the information the IRS requests. This is particularly helpful when dealing with a field or office audit. The more organized you are with the revenue agent, the more trustworthy you’ll appear and the more faith they’ll have in the accuracy of the information you provide.
- Check to see if there could be problems with other tax credits or other tax years. If it turns out a mistake you made in one tax year was also made in another tax year, there’s a good chance the IRS will find out about it during the audit.
- Review any applicable audit technique guides (ATGs) offered by the IRS. These are guides the IRS gives its own examiners and will offer insight into what the IRS will look for during the audit.
- Consult with a tax professional with experience handling audits concerning clean energy tax credits. A tax pro can help prevent an audit from leading to bigger problems, especially for office or field audits that involve face-to-face interaction.
If you realize you claimed a green energy credit incorrectly before the IRS contacts you about an audit, you have a few different options, including amending your return or making a voluntary disclosure – the right choice depends on the specifics of the situation.
Green Energy Tax Credit Audit FAQs
How does the IRS decide which green energy tax credits to audit?
The IRS usually uses two methods to decide who to audit. The first method involves random selection, while the second method involves using computers to recognize potential red flags. These flags might include information that falls outside what the IRS considers “normal.”
What happens if the IRS disallows my clean energy tax credit?
As long as the error was due to negligence or a misunderstanding of the law, you should expect to have to pay back the tax credit, plus pay any interest and audit penalties. However, if the error was intentional, you could face stiffer penalties and even criminal charges.
How long do I need to keep records related to clean energy tax credits?
Six years. Generally speaking, the IRS has three years from the date a return is filed to audit it. If those audits reveal a significant mistake, then the IRS can audit up to six years’ worth of returns.
What industries face more green energy tax audits?
Because these tax credits are usually related to environmental goals, companies and businesses associated with helping the environment often face a higher chance of being chosen for a clean energy tax audit. Some of these industries include electric vehicle refueling, solar energy, wind energy, hydrogen fuels, and carbon sequestration.
Professional Tax Help With Clean Energy Tax Audits
It’s anticipated that IRS audits involving green energy tax credits will increase over the next few years. Therefore, now’s a good time to review past tax filings to make sure tax credits from prior years were properly claimed. If you’re not sure what exactly to look for, professional tax services from Wiggam Law can help. Schedule a consultation today by either calling (404) 233-9800 or using our online contact form.