LINCOLN, Neb. (DTN) -- A new audit of biofuel tax credits called for the IRS to use more of its enforcement tools after $30.3 million in credits were improperly granted in 2022, according to an April 2024 report from the Treasury Inspector General for Tax Administration.

The IG said in its report it conducted an analysis of a sample of 124 taxpayers who claimed biofuel tax credits and found 42 taxpayers who did not provide approved registration numbers or certificates of biofuels. The group of taxpayers claimed about $252.6 million in biofuel tax credits.

"Therefore, these claims would not be allowable," the IG report said.

"Under current law, the IRS could only address these claims after the returns are filed and examined and it issues notices of deficiency to the taxpayers, as appropriate. The IRS does not have the legal authority to deny biofuel tax credits or otherwise enforce the registration requirements on taxpayers who are not eligible to receive the credits at the time a tax return is filed."

Of the 42 taxpayers identified, the IG found 13 who received about $25.8 million in tax credits from the alternative fuel credits but didn't provide registration numbers or biofuel certificates.

The alternative fuel credit provides a 50-cent credit for each gallon of alternative fuel or gasoline gallon equivalents of a nonliquid alternative fuel sold for use in a motor vehicle or motorboat. Such fuels include liquefied petroleum gas, compressed or liquefied natural gas, compressed or liquefied gas derived from biomass.

The IG also found 29 taxpayers out of 75 sampled who claimed the $1-per-gallon biodiesel or renewable diesel mixture credit. Those taxpayers received about $4.5 million in credits for which proper certificates were not provided, according to the report.

The IRS's compliance efforts are primarily focused on biofuel tax credit claims made on form 8849, Schedule 3, certain fuel mixtures and the alternative fuel credit, and form 720, Schedule C, claims, and that "more effective efforts could be undertaken" to evaluate claims made on the form 4136, credit for federal tax paid on fuels.

Since the IG examined only a sample of tax credits claimed, the report didn't analyze how many total taxpayers did not provide proper registration or certification when claiming biofuels credits.

The number of taxpayers not providing registration numbers of biofuels certificates could be much higher, as the analysis represents just a small fraction of more than 30,000 claims.

The IG report said the highest biofuel tax credit claims have been made using the form 8849, schedule 3.13 specifically from tax years 2019 through 2022, the report said.

Almost 1,500 claims were made for more than $3.5 billion using form 8849, according to the report. During the same period more than 16,000 claims totaling more than $600 million were made on form 4136. Almost 12,000 claims were made for about $100 million on form 8864 and more than 2,000 claims for about $33 million were made on form 6478.

"The IRS is not using all of the compliance tools to encourage more tax compliance of biofuel tax claims," the IG report concluded.

The IG said it found the IRS does not address "improper biofuel tax credit claims" during filing because it "lacks legal authority" to do so and can only address claims during examinations.

The Treasury IG made several recommendations to the IRS to ensure the biofuels tax credits claimed are valid.

That includes the IRS developing a legislative proposal to give the agency the authority to ensure taxpayers claiming biofuel credits actually qualify.

The IG also recommended that the IRS "conduct examinations" on the 42 taxpayers identified in the analysis to "ensure the validity of the credits claimed."

Other recommendations include examining more tax forms involving biofuel credits and partnering with the U.S. Environmental Protection Agency to use the agency's "expertise and data" involving taxpayers who claim biofuels credits.

The IG said it also considered the possibility of the IRS conducting compliance checks when tax returns are received.

"However, IRS management stated that the IRS cannot deny biofuel tax credits when income tax returns are filed without an examination subject to deficiency procedures," the IG report said.

"IRS management stated they are unable to use so-called 'math-error authority' to deny biofuel tax credits even though the taxpayers may have failed to obtain the certifications and registrations required by law. The IRS's math error authority is limited to specific categories of mathematical or clerical errors, and while the omission of information from a form or schedule can constitute a math error under the law, it is the IRS's position that the law must require the inclusion of that information on a taxpayer's return for math error authority to be applicable."

Todd Neeley can be reached at todd.neeley@dtn.com

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