KBKG Tax Insight: IRS Issues Warning on Scams Involving Energy Tax Credit Transfers

The Internal Revenue Service (IRS) recently published an article issuing a warning about a new scam involving the misrepresentation of rules surrounding the transferability of clean energy tax credits under the Inflation Reduction Act (IRA).

KBKG Insight:

The market for transferable clean energy credits, notably solar credits, has expanded significantly following the issuance of tax regulations detailing the new transferability provisions. These provisions allow taxpayers to transfer their clean energy tax credits to unrelated parties for cash. Unfortunately, the program is susceptible to fraud from bad actors who may misrepresent the facts or fail to address tax implications to unsuspecting taxpayers. Working with a firm like KBKG helps to mitigate risks and potential penalties.

Overall, the new rules have created a market in which education and alignment on due diligence by legal and tax professionals are critical to managing transaction risks effectively. Some key considerations:

Regulatory Compliance: It is critical for participants in the clean energy market to ensure they fully comply with all regulatory requirements set forth in the IRA and published guidance. This includes eligibility criteria, registration process, and tax reporting requirements.

Risk Management: It is crucial to address key recapture risks such as: Eligible cost basis risk, sale risk and abandonment risks. Sellers of energy credits are required to notify buyers of any recapture event during a five-year recapture period. Buyers of energy credits must repay the IRS in the event of a recapture event.

Tax Implications: Buyers of energy credits need to understand the limitations of the usage of acquired energy credits based on passive activity rules.