Congress often uses the tax system to implement policy goals. For example, one way Congress tries to promote environmental improvements is to propose clean energy tax credits. These credits aren’t new, but the Inflation Reduction Act of 2022 recently made some changes that affect individuals and businesses.
These aren’t the simplest tax credits to claim and usually require special forms (IRS Form 3468, Investment Credit for businesses, and IRS Form 5695, Residential Energy Credits for individuals). Because of this complicated process, as well as the propensity of scammers to use tax credits to take advantage of victims, it’s not uncommon for taxpayers to learn that they’ve incorrectly claimed one or more clean energy tax credits.
This article discusses what your options are if you discover that you may have improperly claimed a clean energy tax credit.
Key Takeaways
- Clean energy tax credits are a great way to save money while helping the environment, but they’re not always easy to claim correctly.
- Incorrectly claiming a clean energy tax credit can result in penalties, interest, and repayment of some or all of the credit.
- If you discover a problem with the tax credit, you can do nothing, file an amended tax return, or proactively notify the IRS of the error.
Signs There May Be a Problem With a Clean Energy Tax Credit
There are multiple ways for clean energy tax credits to go wrong. Here are some warning signs that you’ve either incorrectly claimed one or will have problems supporting the credit if the IRS were to audit you.
- The cost of a project you claimed turned out to be overestimated.
- You purchased a vehicle, equipment, or building upgrades that turned out to be ineligible for the tax credit claimed.
- Your income for the year you take the tax credit ends up being notably higher than expected.
- You don’t have the paperwork to substantiate the tax credit.
- You purchased one or more tax credits from a seller and later learned that the seller wasn’t eligible for those tax credits or otherwise has a questionable tax compliance history.
- You didn’t use a qualified facility for a clean energy activity, like hydrogen fuel production or carbon dioxide sequestration.
Penalties for Incorrectly Claiming Clean Energy Tax Credits
If you incorrectly received a clean energy tax credit, there are three main costs you can expect to pay as an “audit penalty” for the mistake.
The Tax Credit
As you might expect, the IRS is going to want you to pay back the tax credit (or the part you weren’t eligible for).
Formal Penalties
The exact amount of the penalty varies on the severity of your incorrect tax credit claim and when you fix it. If you were negligent in claiming the clean energy tax credit, the penalty will usually be at least 20% of the credit claimed.
If you fraudulently claimed the clean energy tax credit, then the Imposition of Fraud Penalty applies. This is 75% of underpayment of tax that’s attributed to the fraud. This 75% monetary penalty applies in cases of civil tax fraud.
If incorrectly claiming the credit resulted in an underpayment of tax, the penalty will be 20% of that underpayment.
If the mistake resulted in you claiming an excessive amount for the credit, the penalty may be 20% of that excessive amount. Note that this excessive credit penalty won’t apply if either the underpayment penalty or Imposition of Fraud Penalty applies.
The penalties could be much more severe in rare cases of criminal tax fraud (tax evasion). Monetary fines could amount to hundreds of thousands, and a conviction could lead to multiple years in prison.
Interest
The IRS charges interest for the penalties and unpaid taxes. The exact rate varies based on the applicable quarterly interest rates.
What To Do If You Believe You Incorrectly Claimed a Clean Energy Tax Credit
If you discover a mistake with your clean energy tax credit, you typically have three options:
- Do nothing.
- File an amended return.
- Voluntarily disclose the incorrectly claimed tax credit.
Do Nothing
Depending on the nature of your mistake, the IRS’ computer systems may not catch the error. It is also possible that the IRS decides that the cost of auditing your return exceeds what they can expect to recover from the audit (unlikely, but theoretically possible).
The problem with this approach is that if you decide to do nothing in response to the error and the IRS takes action, the financial consequences could be more severe than if you came forward on your own. Not only will you end up paying more in interest, but the IRS is less likely to be lenient on potential penalties.
File an Amended Tax Return
For most taxpayers, this will probably be the best course of action. If you claimed the clean energy tax credits as an individual, you’ll most likely need to complete and file IRS Form 1040-X, Amended U.S. Individual Income Tax Return. If you’re a business, the form you’ll use depends on your business form, but could include:
- IRS Form 1120-S, U.S. Income Tax Return for an S Corporation
- IRS Form 1120-X, Amended U.S. Corporation Income Tax Return
- IRS Form 1065-X, Amended Return for Partnerships
Voluntary Disclosure
If you knowingly and intentionally claimed a clean energy tax credit you knew you weren’t eligible for (or engaged in any other willful tax noncompliance conduct), the IRS has a voluntary disclosure policy that could minimize your risk of criminal prosecution.
If you come forward with timely, truthful, and complete disclosures about your tax noncompliance, the IRS will agree to recommend that criminal charges not be brought against you. Taking advantage of voluntary disclosure doesn’t guarantee you’ll be immune from criminal prosecution, but it does minimize the chances. To be eligible for voluntary disclosure, you’ll need to:
- Cooperate with the IRS in calculating your correct tax bill;
- Pay (in full or overtime) any unpaid tax bill (including penalties and interest); and
- Voluntarily disclose the willful noncompliance before a civil or criminal investigation begins or the IRS receives information about the noncompliance from a third party or criminal enforcement action.
Voluntary disclosure is sometimes available in other situations. For example, because of the sheer number of businesses that incorrectly claimed the Employee Retention Credit (ERC), the IRS announced a special voluntary disclosure program specifically for this tax credit. Your tax professional can inform you if such a program becomes available for a specific clean energy tax credit.
Getting Help Fixing a Clean Energy Tax Credit Mistake
Deciding which approach to take may require the advice of a tax professional. If there’s a possibility of civil or criminal tax fraud, you’ll probably want the tax professional you speak with to be an attorney. Even if filing an amended return is your best option, consulting with a tax professional may still be a good idea.
They can help you decide what changes to make and how to provide the correct information to the IRS. This can assist in the identification of documents and other information you’ll need to provide. If it turns out correcting the mistake could result in a significant tax bill, your tax professional can also negotiate with the IRS on your behalf and help you settle your tax with options like:
- An offer in compromise (OIC)
- An installment agreement or payment plan
- Currently Not Collectible (CNC) Status
- Innocent spouse relief
Clean Energy Tax Credits FAQs
What should I do if the IRS sends me a notice about my clean energy tax credit?
The notice should explain how to respond. You’ll most likely need to gather documents and other information requested in the notice and send it to the IRS. Contact a tax professional for guidance if you’re unsure what to do.
How far back can the IRS go to audit my clean energy tax credit?
The IRS usually won’t audit returns older than three years, but if they find significant errors, they may go back as far as six years. If they can prove fraud, they can go as far back as to when the fraud occurred.
Will I go to jail for incorrectly claiming clean energy tax credits?
Probably not. You only need to worry about imprisonment and criminal charges if you intentionally lied or misrepresented information to the IRS to obtain the tax credit. Most individual and business taxpayers who make a mistake with a tax credit only need to pay back the credit, plus penalties and interest.
Can I reduce penalties for an incorrectly claimed clean energy tax credit?
Maybe. If you come forward before the IRS contacts you about the error, the IRS may agree to reduce any applicable penalties.
What documents do I need to give the IRS to prove my clean energy tax credit claim?
It depends, but documents such as contractor invoices, permits, receipts, and project estimates are often needed. You may also need to provide additional documentation to prove eligibility, such as vehicle specifications if you claimed commercial clean vehicle credit, for instance.
How a Tax Attorney Can Help With Tax Credit Mistakes
If you think you made a mistake with a clean energy tax credit, contact a tax attorney, such as one from Wiggam Law. We can examine your unique situation to confirm if an error exists. If it does, we can discuss your best course of action. You can schedule a consultation by calling (404) 233-9800 or using our online consultation form.