Beware of Clean Energy Tax Credit Scam

Taxpayers need to be vigilant about a new scam involving clean energy tax credits under the Inflation Reduction Act (IRA). Unscrupulous tax return preparers are misrepresenting the rules for claiming these credits, leading many taxpayers to file incorrect returns.

The IRA allows taxpayers to purchase eligible federal income tax credits from investments in clean energy to offset their tax liability. However, an increasing number of tax preparers are advising clients to claim purchased energy credits improperly. These preparers file returns that inappropriately offset income tax from sources like wages, Social Security, and retirement account withdrawals using these credits.

This misuse of tax credits can have serious repercussions. Under the IRA, individuals who purchase tax credits are subject to passive activity rules, meaning they can only use those credits to offset income tax from passive activities. Passive activities typically include rental income or business activities in which the taxpayer does not materially participate. Most taxpayers, however, do not have passive income or a passive income tax liability, and most investment activities are not considered passive.

Claiming these improper credits can lead to significant IRS compliance actions. Taxpayers may be required to repay the improperly claimed credit and any accrued interest and potential penalties.

To avoid falling victim to this scam, it is crucial to consult with a trusted tax professional who can accurately determine your eligibility for purchasing and claiming clean energy tax credits. If you suspect you have been misled by a tax preparer regarding these credits, report it to the IRS immediately. For more information, please get in touch with The Center for Financial, Legal, & Tax Planning, Inc. professionals at (618) 997-3436.