TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Inspections and Evaluations

 

 

RECOVERY ACT

 

Review of Section 1603 Grants In Lieu
of Energy Investment Tax Credit

 

 

 

December 17, 2013

 

Reference Number:  2014-IE-R006

 

 

 

This report has cleared the Treasury Inspector General for Tax Administration disclosure
review process and information determined to be restricted from public release has
been redacted from this document.

 

Redaction Legend:

2c=Law Enforcement Tolerance

 

 

Phone Number   |  202-622-6500

E-mail Address  |  TIGTACommunications@tigta.treas.gov

Website             |  http://www.treasury.gov/tigta

 

 

December 17, 2013

 

 

MEMORANDUM FOR DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT

 

FROM:                            R. David Holmgren /s/ R. David Holmgren

                                         Deputy Inspector General for Inspections and Evaluations

 

SUBJECT:                    Final Inspection Report – Review of Section 1603 Grants in Lieu of Energy Investment Tax Credit (IE-13-003-A)

 

This report presents the results of our inspection to determine if the Internal Revenue Service (IRS) has established a permanent process to identify taxpayers that have received American Recovery and Reinvestment Act of 2009 (Recovery Act)[1] Section 1603 grants.[2]

The Recovery Act provides separate funding to the Treasury Inspector General for Tax Administration through September 30, 2013, to be used in oversight activities of IRS programs.  This inspection was conducted using Recovery Act funds.

Synopsis

The IRS has not developed a permanent process to identify taxpayers that have received Section 1603 grants and that may have erroneously claimed one of two investment tax credits, the Energy Production Tax Credit[3] or the Energy Investment Tax Credit,[4] on the same property.  In addition to other restrictions, taxpayers, upon accepting the Section 1603 grant, elect not to claim an investment tax credit for qualifying facilities placed into service on or after January 1, 2009.[5]  As of May 10, 2013, the Department of the Treasury has awarded 9,016 grants totaling $18.5 billion.

The IRS is currently conducting a Compliance Initiative Project (CIP)[6] on taxpayers that received Section 1603 grants primarily during 2009.[7]  During our review period, an extension of the time period for the CIP was requested and approved for June 30, 2015.  Although the CIP was in process during our review, tentative results were available.  The Large Business and International Division[8] selected and examined 16 taxpayers and reportedly identified significant issues in eight.  Similarly, the Small Business/Self‑Employed Division[9] selected 83 taxpayers for examination and identified changes for 51.  Although the results are not final and cannot be predicted, the IRS’s recent justification to extend the CIP stated,  “Anecdotes from the Service [IRS] staff attending industry and practitioners’ discussions suggest that some practitioners are encouraging the use of leasing transactions because that allows fair market value to be overstated to increase the grant amount.”  This statement and the apparent noncompliance issues identified in the CIP may indicate the need for further oversight of the $18.5 billion distributed through this grant program.

Recommendation

We recommended that the Commissioners for Large Business and International Division and Small Business/Self-Employed Division evaluate the feasibility of establishing an indicator on taxpayer accounts that received Recovery Act Section 1603 grants.  This indicator could be established and updated based on the Section 1603 grant recipient file sent by the Department of the Treasury quarterly and annually.  This indicator would provide permanent notice on the IRS files that this taxpayer had received a Section 1603 grant and therefore caution should be taken in processing any amended returns that claim an investment tax credit.

Response

IRS management agreed with the recommendation.  The Commissioners for Small Business/ Self-Employed Division and Large Business and International Division plan to evaluate the feasibility of establishing an indicator on taxpayers’ accounts that received Recovery Act Section 1603 grants.  If they determine that establishing the proposed indicator is not feasible or practical, they will consider other effective alternatives.  Management’s complete response is included as Appendix V.

If you have any questions, please contact me at (202) 927-7048 or Kevin P. Riley, Director, Office of Inspections and Evaluations, at (972) 249-8355.

 

 

 

Table of Contents

 

Background

Results of Review

The Internal Revenue Service Does Not Have a Permanent Process to Identify Taxpayers That Received Section 1603 Grants and May Have Erroneously Claimed an Investment Tax Credit

Recommendation 1:

Appendices

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Overview of Section 1603 Grants Awarded

Appendix V – Management’s Response to the Draft Report

 

 

Abbreviations

 

CIP

Compliance Initiative Project

IRS

Internal Revenue Service

ITC

Investment Tax Credit

 

 

Background

 

The American Recovery and Reinvestment Act of 2009 (Recovery Act),[10] enacted on February 17, 2009, contained both spending and tax provisions, including the allocation of $787 billion over 10 years to stimulate the national economy.  One of the stated goals of the Recovery Act is to “…foster unprecedented levels of accountability and transparency in government spending.”  To do so, the Recovery Act created the Recovery Accountability and Transparency Board[11] with two goals:  to provide transparency of Recovery Act expenditures and to prevent and detect fraud, waste, and mismanagement.

The Internal Revenue Service (IRS) is responsible for administering the tax law changes contained in the Recovery Act.  In April 2009, the IRS received an appropriation of Recovery Act funds totaling $202 million.[12]  These funds were required to implement the necessary tax changes resulting from provisions of the Recovery Act.  The changes included, but were not limited to, reprogramming the IRS computer systems, updating related tax forms and publications, and providing customer service to assist taxpayers in obtaining their Recovery Act benefits.

Section 1603 of the Recovery Act contains provisions that impact the IRS’s administration of the tax laws.  The purpose of a Section 1603 grant is to reimburse eligible applicants for a portion of the cost of installing a specific energy property used in a trade or business or for the production of income.  Section 1603 of the Recovery Act authorizes the Department of the Treasury to make payment to individuals or companies that place specific types of energy properties into service on or after January 1, 2009, provided certain conditions are met.  This cash payment to an individual or company is made instead of an investment tax credit (ITC), either the Energy Production Tax Credit[13] or the Energy Investment Tax Credit.[14]  The Department of the Treasury forwards a file containing the Section 1603 recipients’ information quarterly and annually to the IRS for information.

As of May 10, 2013, the Department of the Treasury has awarded 9,016 grants totaling $18.5 billion.[15]  Figure 1 shows the growth of the program by year in terms of the number of grants awarded and amounts awarded.

Figure 1:  Total Amount and Number of Grants Awarded by Year

To see the figure,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

While these grants have been given to a variety of energy property types, wind and solar properties have received the majority of the funds, totaling $12.6 billion and $4.4 billion respectively.  Appendix IV provides a more detailed overview of the amounts awarded to each type of energy property.

This review was performed at the IRS National Headquarters in Washington, D.C., and the Office of the Deputy Commissioner, Domestic, Large Business and International Division, in Houston, Texas, during the period April through August 2013.  We conducted this inspection in accordance with the Council of the Inspectors General for Integrity and Efficiency Quality Standards for Inspections.  Detailed information on our objective, scope, and methodology is presented in Appendix I.  Major contributors to the report are listed in Appendix II.

 

 

Results of Review

 

The Internal Revenue Service Does Not Have a Permanent Process to Identify Taxpayers That Received Section 1603 Grants and May Have Erroneously Claimed an Investment Tax Credit

In May 2011, the IRS initiated a Compliance Initiative Project (CIP) of some taxpayers that received Section 1603 grants primarily during 2009.[16]  The CIP was originally scheduled to be completed in June 2013 and was subsequently extended (in May 2013) to include additional returns and to be completed by June 30, 2015.  A CIP is an executive‑approved study involving a population of taxpayers with a unique tax issue.  These projects traditionally are approved for a set period of time, but they can be reconsidered and reapproved with an adjusted scope and new completion period.  CIPs involve examinations of specific taxpayers within the group using internal and/or external data to identify potential areas of noncompliance, many times done by selecting a sample of taxpayers from the population.  The purpose of a CIP is to identify and correct areas of noncompliance.  This particular CIP seeks to study and improve compliance by taxpayers that received Section 1603 grants from the Department of the Treasury.

While this CIP is still ongoing, we reviewed the CIP’s preliminary results as of July 17, 2013.  The Small Business/Self-Employed Division examined a sample of returns where the dollar value of the grant was greater than or equal to **2c***, a threshold that encompassed the majority of the grants attributed to small business and self-employed taxpayers.  The Small Business/Self-Employed Division examined 83 taxpayers and identified changes in 51 (61 percent).[17]  The Large Business and International Division examined returns where the dollar value of the grant was greater than or equal to **2c***.  According to the CIP Status Report, the Large Business and International Division conducted 16 examinations and identified potential significant issues resulting in changes in eight examinations (50 percent).[18]

When the Recovery Act became law, one of the commitments by Congress to the American people was to ensure that the funds being distributed would be subject to unprecedented Government and public transparency and that these funds would be subject to the highest degree of protection to prevent or identify fraud, waste, abuse, and mismanagement.  In light of this commitment, the noncompliance issues identified in the CIP may indicate the need for further oversight of the $18.5 billion distributed through this grant program.

While the CIP shows that the IRS has provided some initial oversight, CIPs have an established completion date and therefore, to remain open, they must periodically be reconsidered and reapproved.  The IRS needs a process to identify taxpayers that receive Section 1603 grants as well as ITC benefits from the same property.  The current CIP is an excellent way to identify a sample of returns for examination.  However, this is a relatively short-term effort considering that the Internal Revenue Code allows qualified taxpayers to use ITC’s for up to five years prior and 20 years after the ITC was original claimed.  A taxpayer may initially comply with the program rules and requirements and subsequently file amended tax returns claiming the ITC.  The IRS has no indicator to identify that the taxpayer had received a Section 1603 grant for that or similar property and that the amended return may need additional review to ensure an ITC was not incorrectly claimed.

Recommendation

Recommendation 1:  We recommended that the Commissioners for the Small Business/ Self-Employed Division and Large Business and International Division evaluate the feasibility of establishing an indicator on taxpayers’ accounts for taxpayers that received Recovery Act Section 1603 grants.  This indicator could be established and updated based on the Section 1603 grant recipient file sent by the Department of the Treasury quarterly and annually.  This indicator would provide permanent notice on the IRS files that this taxpayer has received a Section 1603 grant and therefore caution should be taken in processing any amended returns that claim the ITC.

Management’s Response:  IRS management agreed with the recommendation.  The Commissioners for Small Business/Self-Employed Division and Large Business and International Division plan to evaluate the feasibility of establishing an indicator on taxpayers’ accounts that received Recovery Act Section 1603 grants.  If they determine that establishing the proposed indicator is not feasible or practical, they will consider other effective alternatives, such as continuing to expand the CIP.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

The overall objective of this review was to determine if the IRS has established a permanent process to identify taxpayers that have received Recovery Act,[19] Section 1603 grants.[20]

To accomplish this objective, we:

I.                   Documented the procedures used to identify taxpayers that received the Section 1603 grants and are claiming an ITC.

II.                Verified the functionality of any system or processes put in place by the IRS to track or identify taxpayers claiming an ITC that may have erroneously received Section 1603 grants.

III.             Determined whether the IRS has established effective controls to track, identify, record, and report list of recipients for ITC claims.

 

Appendix II

 

Major Contributors to This Report

 

Kevin P. Riley, Director, Inspections & Evaluations

Stanley Rinehart, Supervisory Evaluator

Joseph Wolemonwu, Program Analyst

Lindsay Steward, Program Analyst

 

Appendix III

 

Report Distribution List

 

Acting Commissioner  C

Office of the Commissioner – Attn:  Chief of Staff  C

Commissioner for Operations Support  OS

Assistant Deputy Commissioner for Services and Enforcement  SE

Commissioner, Large Business and International Division  SE:LB

Commissioner, Small Business/Self-Employed Division  SE:S

Chief Counsel  CC

National Taxpayer Advocate  TA

Director, Office of Legislative Affairs  CL:LA

Director, Office of Program Evaluation and Risk Analysis  RAS:O

Office of Internal Control  OS:CFO:CPIC:IC

Audit Liaisons: 

Large Business and International Division  SE:LB
Small Business/Self-Employed Division  SE:S

 

Appendix IV

 

Overview of Section 1603 Grants Awarded

 

Figure 2:  Grant Amounts Awarded to Each Type of Energy Property

To see the figure,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page

 

Appendix V

 

Management’s Response to the Draft Report

 

To see the complete response,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 



[1] Pub. L. No. 111-5, 123 Stat. 115 (2009).

[2] Taxpayers upon accepting the Section 1603 grants elect not to claim the energy tax credits under Internal Revenue Code (I.R.C.) Section (§) 48 of the renewable electricity production tax credit under I.R.C. § 45 with respect to otherwise qualifying facilities placed into service on or after January 1, 2009.

[3] I.R.C. § 45.

[4] I.R.C. § 48.

[5] There are other adjustments to computing future taxability that the taxpayer agrees to when receiving the Section 1603 grant.

[6] A CIP is any activity involving contact with specific taxpayers and collection of taxpayer data within a group, using either internal or external data to identify potential areas of noncompliance within the group, for the purpose of correcting the noncompliance.  A CIP Part 2 authorizes examinations of 50 or more taxpayers.

[7] The CIP has been expanded to include Tax Years 2010 and 2011.

[8] The Large Business and International Division is an operating division within the IRS that serves corporations, subchapter S corporations, and partnerships with assets greater than $10 million.  These businesses typically employ large numbers of employees, deal with complicated issues involving tax law and accounting principles, and conduct business in an expanding global environment.

[9] The Small Business/Self-Employed Division is an operating division within the IRS that serves small business and self-employed taxpayers by helping them to understand and meet their tax obligations.

[10] Pub. L. No. 111-5, 123 Stat. 115 (2009).

[11] Eleven Inspectors General from various Federal agencies serve with the chairman on the Recovery Accountability and Transparency Board.  The Recovery Accountability and Transparency Board issues quarterly and annual reports to the President and Congress and, if necessary, “flash reports” on matters that require immediate attention.

[12] This appropriation included $80 million for Fiscal Years 2009 through 2010 to implement the Health Coverage Tax Credit program.  The IRS also received $123 million for supporting tax provision changes cited in the Recovery Act.  The Department of the Treasury retained $1 million for administrative oversight, resulting in the IRS receiving $202 million.

[13] Internal Revenue Code Section 45.

[14] Internal Revenue Code Section 48.

[15] The Department of the Treasury regularly publishes a list of Section 1603 grants awarded on its website and sends quarterly and annual reports on this program to the IRS.

[16] The CIP has been expanded to include Tax Years 2010 and 2011.  A tax year is a 12‑month accounting period for keeping records on income and expenses used as the basis for calculating the annual taxes due.  For most individual taxpayers, the tax year is synonymous with the calendar year.

[17] As of July 12, 2013.

[18] As of September 17, 2012.

[19] Pub. L. No. 111-5, 123 Stat. 115 (2009).

[20] Taxpayers, upon accepting the Section 1603 grants, elect not to claim the energy tax credits under Internal Revenue Code Section 48 of the renewable electricity production tax credit under Internal Revenue Code Section 45 with respect to otherwise qualifying facilities placed into service on or after January 1, 2009.