Clean Energy Tax Credit – IRS Warns of a new scam .

tysllpTax Accounting

Tax Credit Scam

The Internal Revenue Service (IRS) has issued a critical alert regarding an emerging fraudulent scheme involving the misappropriation of clean energy tax credits established under the Inflation Reduction Act (IRA).

This sophisticated scam exploits the transferability provisions of the IRA, which allow for the purchase of eligible federal income tax credits derived from clean energy investments. Unscrupulous tax preparers are manipulating these provisions. They are breaking the rules by filing returns that improperly claim purchased clean energy credits for taxpayers who are ineligible to benefit from them.

How Does it Work?

The scheme primarily targets Form 1040 filers, with preparers erroneously applying IRA credits to offset income tax from various sources, including wages, Social Security benefits, and qualified retirement plan distributions. This practice flagrantly disregards the passive activity rules that govern the utilization of purchased tax credits under the IRA.

It is crucial to emphasize that individuals purchasing tax credits under the IRA are subject to stringent passive activity limitations. These rules generally restrict the use of purchased credits to offsetting income tax solely from passive activities. However, it’s important to note that most taxpayers do not generate passive income or incur passive income tax liabilities. Furthermore, the majority of investment activities do not meet the criteria for passive classification under the Internal Revenue Code.

What is Being Done?

IRS Commissioner Danny Werfel has highlighted this scheme as another instance of bad actors exploiting the intricacies of tax law to entice taxpayers into claiming credits for which they are not eligible. The IRS is actively monitoring this situation and strongly advises taxpayers to seek counsel from reputable tax professionals before attempting to claim complex credits such as those related to clean energy.

From a compliance perspective, individual taxpayers who claim inappropriate credits face significant risks. These include potential future enforcement actions by the IRS, mandatory repayment of inflated credit amounts, accrued interest, and possible penalties for non-compliance.

Be Aware.

For taxpayers considering the purchase of clean energy credits under the IRA, it is imperative to consult with a qualified tax professional. This consultation should focus on determining eligibility for credit purchases and assessing the applicability of passive activity limitations and other relevant tax code provisions to the taxpayer’s specific situation.

The IRS has provided additional resources on clean energy initiatives through the Inflation Reduction Act of 2022 page on IRS.gov. This information serves as a valuable starting point for taxpayers seeking to understand the complexities of these new tax provisions.

It’s worth noting that this clean energy credit scam is not an isolated incident. The IRS continues to warn taxpayers about other prevalent schemes involving inappropriate claims for various tax credits. These include misrepresentations related to the Fuel Tax Credit, the Sick and Family Leave Credit, and household employment taxes. These schemes, often propagated through misleading social media advice and unscrupulous promoters, have resulted in a surge of dubious claims. Consequently, legitimate refunds are being delayed as the IRS implements more stringent verification processes to combat fraud.

In conclusion, taxpayers must exercise extreme caution when approached with opportunities to claim unfamiliar tax credits. Thorough due diligence and consultation with credentialed tax professionals are essential steps in navigating the complex landscape of tax incentives while maintaining compliance with federal tax regulations.

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