A tax audit found that one-third of U.S. biofuel tax credits were improperly awarded

The erroneous claims in the sample, which included credits for so-called alternative fuels and biodiesel, total $30.3 million of the approximately $252 million in credits claimed by sampled taxpayers.

Fraud and the resulting payment of erroneous tax refunds have plagued the Internal Revenue Service since Congress passed the biofuel tax credit program in 2004.

The most egregious scheme – conducted under the guise of Utah biodiesel company Washakie Renewable Energy – resulted in the IRS erroneously disbursing more than $511 million in tax credits.

Considered one of the largest frauds in U.S. history, the scam led to the arrest of five people who were tried, convicted, and ultimately sentenced to terms ranging from 6 to 40 years in prison, as well as the restitution of their ill-gotten gains.

With the introduction of additional and expanded clean energy tax credits in the Inflation Control Act of 2022, the Treasury Office of Inspector General for Tax Administration (TIGTA) says there is even greater incentive to take advantage of biofuel tax credits and make fraudulent biofuel claims , which does not exist or is not eligible for biofuel tax credits.

The office’s latest audit, published late last month, aimed to assess the effectiveness of IRS procedures designed to detect and prevent questionable claims for biofuel tax credits.

TIGTA found that the IRS continues to fail to use all compliance tools at its disposal to encourage greater fairness in biofuel tax filings.

Section 4101 of the Internal Revenue Code requires eligible taxpayers to register with the IRS before producing or importing biofuels.

Additionally, some taxpayers claiming biodiesel tax credits are not required to be registered, but must provide a biodiesel certificate from the manufacturer demonstrating that the biodiesel used to produce the mixture met the EPA’s biodiesel specifications and registration requirements.

The 42 taxpayers who were subjected to TIGTA inspection presented neither an approved registration number nor a biodiesel certificate.

“Therefore, these claims will not be admissible,” the agency said in a summary of its investigation.

In a particularly eye-catching section of the report, the inspector general’s office notes that “Under current law, the IRS may address these claims only after returns have been filed and examined and after issuing notices of deficiency to taxpayers, where appropriate.”

“The IRS does not have the legal authority to deny biofuel tax credits or otherwise enforce registration requirements on taxpayers who are not eligible to receive the credits when they file their tax returns.”

It further states that the IRS’s compliance efforts are primarily focused on biofuel tax credit claims filed on Form 8849, Schedule 3, Certain Fuel Blends and Alternative Fuel Credit, and Form 720, Schedule C, Claims and “more may be undertaken effective efforts to evaluate claims submitted on Form 4136, Credit for Federal Tax Paid on Fuel.

TIGTA recommended that the IRS:

1. engage with the Internal Revenue Service’s Tax Policy Department to develop legislative proposals to ensure that taxpayers claiming biofuel tax credits are eligible for the biofuel credit and are properly registered or provide the required Biodiesel Certificate with their tax returns;
2. establish a Compliance Initiative project to audit the 42 taxpayers red-flagged by TIGTA to verify that the biofuel tax credits claimed are correct and that these taxpayers are properly registered and have the required certificates;
3. see more Form 4136 for biofuel tax credit claims; AND
4. Partner with EPA to leverage the agency’s knowledge and data on taxpayers who have claimed biofuel tax credits.

The bureau found that IRS officials agreed with three of the four recommendations (1, 3 and 4), but only partially agreed with recommendation 2.

Regarding recommendation 2, IRS management said the agency would review the 42 tax returns identified by TIGTA and determine whether compliance is warranted.

The Office of the Inspector General disagreed.

“We believe compliance actions are warranted given that these 42 taxpayers were awarded more than $30 million in biofuel tax credits without providing a valid registration number or producing a Biodiesel Certificate,” the office said.

“Compliance Initiative projects involve contacting specific taxpayers to identify potential areas of non-compliance in order to correct non-compliance. In these 42 cases, the Compliance Initiative Project’s approach is ideal because the study results will be closely tracked through project codes and will provide IRS management with additional support in discussions with the Internal Revenue Service’s Tax Policy Division.”