Audit Studies IRS Efforts to Curb Erroneous Bond Tax Credit Claims

Published by Michael Novogradac on Wednesday, August 7, 2013 - 12:00am

The Treasury Inspector General for Tax Administration (TIGTA) recently turned its eye to tax credit bonds and the tax credits that come with them. Congress has used tax credit bonds in the past few years to address the recession, renewable energy generation and disaster recovery efforts. Tax credit bonds include Clean Renewable Energy Bonds, New Clean Renewable Energy Bonds, Build America Bonds, Midwest Disaster Bonds and bonds issued under seven other programs.

The bondholder receives tax credits that reduce tax liability in lieu of interest. Since 2008, the bondholder has been able to separate these tax credits from the bonds and provide them to investors. The investors can then use the tax credits to offset their tax liability.

There were a couple of issues with allowing this separation of credits and bonds

  1. new entities began claiming the tax credits (previously it had been primarily large financial institutions) and
  2. there was no third-party verification of the legitimacy of tax credit claims.

In 2010, the Internal Revenue Service began remedying the situation by proposing a third-party reporting requirement, collecting comments and issuing a final rule that went into effect earlier this year. Bond issuers, entities that sell bond tax credits to others, and investors are now required to report bond tax credits via a series of forms.

TIGTA wanted to determine how effective the IRS’s progress in developing and implementing process to identify and address bond tax credit noncompliance, and so it audited the agency.

In “Vulnerabilities Exist for Improper or Fraudulent Claims for Bond Tax Credits,” TIGTA studied the more than $700 million in bond tax credits claimed in tax years 2010 and 2011 and provided a recommendation for addressing vulnerabilities.

IRS management agreed with the recommendation and said that it plans to evaluate the compliance risks associated with the bond tax credits and determine strategies for mitigating those risks.

If you’d like to hear more about the audit, tune in to this week’s Tax Credit Tuesday podcast.