IRS isn’t catching fraudulent and excessive home energy credits

Introduction

Stimulus-funded tax credits for home owners making energy efficient upgrades caught on quickly—more than 6.8 million individuals claimed over than $5.8 billion in residential energy credits on 2009 tax returns. But the Internal Revenue Service is unable to verify if individuals claiming credits are actually entitled to them.

A review by Treasury’s tax administration inspector general found that the IRS cannot accurately track and account for the home energy credits.The IRS does not require third-party documentation proving taxpayers actually purchased qualifying home improvements or that improvements were made at a principal residence. IRS relies on individuals claiming energy credits to provide correct information on their tax returns.

The 2009 Recovery Act included provisions for homeowners investing in energy efficiency measures or renewable energy sources. In return, tax payers received a reduction in the amount of taxes owed. Homeowners could credit 30 percent of the cost of alternative energy equipment and energy efficiency measures, like new doors or windows. Investments were only eligible if they were made to an individual’s principal or secondary residence, rental properties and new construction were not eligible.

A computer analysis of 6.4 million2009 tax returns with energy credits processed last year identified 5 percent that did not show any indication of home ownership. The credits claimed on these tax returns amounted to more than $234 million.

The inspector general also found 362 ineligible individuals who claimed $404,578 in energy credits. The IRS lacks a process to identify prisoners or individuals under 18, which is the minimum age for entering a contract required for purchasing a home. But IRS does have information which could have been used to identify fraudulent credits.

“Despite having the data available, the IRS did not develop a process to identify these individuals who filed tax returns erroneously claiming these credits,” the inspector general stated.

Individuals were also allowed credits over the maximum amount of $1,500. The inspector general audit found 171 individuals whose credit exceeded $1,500, amounting to a total of $453,220. The audit determined IRS had failed to implement an electronic filing reject code that would have automatically rejected claim amounts over $1,500.

Recommendations by the inspector general include requesting information supporting eligibility requirements on tax returns, creating a process to screen prisoners and underage filers, and implementing the reject code to disqualify credits that exceed the limit.

FAST FACT: The inspector general identified 100 individuals under the age of 18 who were allowed $61,091 in home energy credits. The youngest individual receiving the credit was 3 years old.