The erroneous claims captured by the sample, which included credits for so-called alternative fuels and biodiesel, total $30.3 million out of the approximately $252 million in credits claimed by the sample taxpayers.
Fraud and the resulting payment of erroneous refunds have plagued the Internal Revenue Service since Congress enacted the biofuel tax credit program in 2004.
The most egregious scheme – carried out under the guise of a Utah biodiesel company, Washakie Renewable Energy – resulted in an erroneous IRS payout of more than $511 million in tax credits.
Considered one of the largest fraud schemes in US history, the scam resulted in the arrest of five individuals who were tried, convicted, and ultimately sentenced to six to 40 years in prison, as well as restitution of their ill-gotten gains.
With the passage of additional and expanded clean energy tax credits in the Inflation Reduction Act of 2022, the office of the Treasury Inspector General for Tax Administration (TIGTA) contends there is even greater incentive to take advantage of biofuel tax credits and make fraudulent claims for biofuel that does not exist or does not qualify for the biofuel tax credits.
The office's latest audit, the results of which were released late last month, was undertaken to assess the effectiveness of IRS procedures to detect and prevent questionable claims for biofuel tax credits.
What TIGTA found was that the IRS is still not using all of the compliance tools at its disposal to encourage more honesty in biofuel tax claims.
Internal Revenue Code Section 4101 requires applicable taxpayers to register with the IRS before producing or importing biofuels.
Additionally, certain taxpayers claiming biodiesel-related tax credits are not required to be registered but must provide a Certificate of Biodiesel from the producer showing that the biodiesel used to produce the mixture met the Environmental Protection Agency's biodiesel specification and registration requirements.
The 42 taxpayers who came under TIGTA's scrutiny failed to provide either an approved Registration number or a Certificate of Biodiesel.
"Therefore, these claims would not be allowable," the agency said in a summary of its investigation.
In a particularly eye-catching portion of the report, the inspector general's office notes that "Under current law, the IRS could only address these claims after the returns are filed and examined and it issues notices of deficiency to the taxpayers, as appropriate.
"The IRS does not have the legal authority to deny biofuel tax credits or otherwise enforce the registration requirements on taxpayers who are not eligible to receive the credits at the time a tax return is filed."
It goes on to say the it found the IRS's compliance efforts are primarily focused on biofuel tax credit claims made on the Form 8849, Schedule 3, Certain Fuel Mixtures and the Alternative Fuel Credit, and Form 720, Schedule C, Claims, and "more effective efforts could be undertaken to evaluate claims made on the Form 4136, Credit for Federal Tax Paid on Fuels."
TIGTA recommended that the IRS:
1. engage with the Department of the Treasury's Office of Tax Policy to develop a legislative proposal to ensure taxpayers claiming biofuel tax credits are entitled to the biofuel credit claims and are properly registered or provide the required Certificate of Biodiesel with income tax returns;
2. establish a Compliance Initiative Project to conduct examinations of the 42 taxpayers red flagged by TIGTA to ensure the validity of the biofuel tax credits that were claimed and that these taxpayers are properly registered and have the required certificates;
3. examine more Forms 4136, involving biofuel tax credit claims; and
4. partner with the EPA to use the agency's expertise and data involving taxpayers that claimed biofuel tax credits.
The office said IRS officials agreed with three of the four recommendations (1,3 and 4), but only partially agreed with recommendation 2.
When it came to recommendation 2, IRS management said the agency would review the 42 tax returns identified by TIGTA and determine if compliance activity is warranted.
The inspector general's office disagreed.
"We believe that compliance activity is warranted given these 42 taxpayers were allowed over $30 million in biofuel tax credits while not providing a valid registration number or not providing the Certificate of Biodiesel," the office said.
"Compliance Initiative Projects involve contact with specific taxpayers to identify potential areas of noncompliance for the purpose of correcting the noncompliance. For these 42 cases, the Compliance Initiative Project approach is ideal in that the results of the examinations will be closely tracked with project codes and provide IRS management with additional support in discussions with the Department of the Treasury's Office of Tax Policy."
