30% IRS Error Rate in $6b Home Energy Tax Credit, Including Claims by Prisoners

On May 18, 2011, the Treasury Inspector General for Tax Administration released Processes Were Not Established to Verify Eligibility for Residential Energy Credits (2011-41-038), citing numerous examples of taxpayer abuse and IRS failures.

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The American Recovery and Reinvestment Act of 2009 (Recovery Act) modified the law related to energy credits to encourage the purchase of energy efficient property and renewable sources of energy for use in a home.  More than 6.8 million individuals claimed more than $5.8 billion in Residential Energy Credits on Tax Year 2009 tax returns processed through December 31, 2010.  The audit was initiated because TIGTA is required to monitor the IRS’s implementation of Recovery Act provisions, and was designed to assess the effectiveness of the IRS’s process to identify erroneous Residential Energy Credits.  Following are a few “lowlights” of TIGTA’s report:

The IRS cannot verify whether individuals claiming Residential Energy Credits are entitled to them at the time their tax returns are processed.

The IRS does not require individuals to provide any third-party documentation supporting the purchase of qualifying home improvement products and/or costs associated with making energy efficiency improvements and whether these qualified purchases and/or improvements were made to their principal residence.

171 individuals claiming $453,220 claimed a credit that exceeded the maximum allowable amount of $1,500 for all filing statuses reporting only one principal residence (or $3,000 for married filing jointly in certain circumstances).

Based on a review of a statistically valid sample of 150 tax returns, TIGTA was unable to confirm homeownership for 45 (30%) of the taxpayers.  Homeownership is required to claim Residential Energy Credits.

TIGTA identified 362 ineligible individuals who were allowed to erroneously claim $404,578 in Residential Energy Credits on their tax returns.  These individuals, including 262 prisoners and 100 individuals under the age of 18 (26 were under age 14), were allowed to erroneously claim these credits because the IRS did not develop a process to identify prisoners or individuals who are too young to buy a home.