Clean Energy Industry Braces for Congressional, IRS Scrutiny

The IRS’s strategic operating plan will give fodder to House Republicans gearing up to probe how clean energy credits are being doled out.

Republicans have identified the Inflation Reduction Act energy credits as an upcoming focus of their oversight efforts. While the IRS says it’s aiming to address the risk of potential fraud as companies claim the credits, Ways and Means GOP members are likely to focus on how those corporations are using them in addition to the IRS’s operations.

The strategic plan will be the subject of congressional inquiries from both parties, including the IRS’s rollout of the energy credits. Lawmakers from across the aisle questioned Treasury Secretary Janet Yellen in hearings last month about expected guidance and other IRA-related issues, but now that oversight is expected to heat up.

The increased enforcement will deter some companies from claiming the clean energy tax credits due to high compliance costs, some tax pros said, working against the Biden administration’s goals for the tax-and-climate law.

“It’s just not worth the expense of preparing for the possibility of an audit and potentially defend an audit to claim the credit,” said Rob Kovacev, a partner at Miller & Chevalier, comparing clean energy to the research credit market where companies were deterred by cost.

More Oversight

Investigations from the House GOP likely will focus on how the IRS is administering the credits as well as a closer look at the recipients themselves, said Chris Armstrong, a partner at Holland & Knight and a former Republican staffer on the House Ways and Means and Senate Finance committees.

Companies claiming the credits may face GOP questioning on whether they have ties to China, whether they’re properly using the credits, and whether the businesses are inefficient, Armstrong said. Ways and Means Republicans blasted the price of the credits earlier this month, saying the money is going to the “wealthy, large corporations, and foreign countries.”

“Republicans were more hesitant than Democrats to do oversight in the private sector,” Armstrong said. “I think those days are over.”

The IRS detailed its plan on how it will spend the nearly $80 billion in new funds from the Inflation Reduction Act and said Thursday part of the money will go to overseeing of the clean energy credits. The agency will use new technology to “make the process for claiming credits as seamless as possible” while tackling fraud, according to the plan.

The agencies will release an electronic pre-filing registry for companies and organizations that want to monetize the tax credits later this year.

In March, the Ways and Means GOP chief oversight counsel Sean Clerget signaled the direction of some of the panel’s investigations. How the private sector is using the credits, their total cost, and whether companies are taking advantage of them are some of questions the committee may evaluate, he said.

The cost of the credits and whether the credits are being used by China “in a tangential way” are issues that have been bubbling up, said Mark Williams, a lobbyist at Ferox Strategies and a former Ways and Means GOP staffer.

“I would expect a lot more scrutiny on those IRA credits,” Williams said. “Republicans are extremely concerned that the Biden administration isn’t following the law or that the rhetoric hasn’t matched the reality of the credits that were passed.”

Preparing for Audit

Companies can claim tax credits as high as 70%, outweighing the compliance costs for some.

“It will add a little bit to projects, but it’s certainly going to be absolutely worth the cost,” said Dustin Stamper, a managing director at Grant Thornton. Companies want to make sure they are following the rules, he said.

How lucrative a tax credit is will depend on: if a project meets certain labor requirements; is located in an energy or low income community; and if the company sources domestically.

IRS enforcers will be learning how to audit new tax credits which involve wage and apprenticeship standards typically overseen by the US Department of Labor and large scale projects funded by the Department of Energy.

IRS field agents are typically not familiar with labor laws, Kovacev said. “How is that agent going to conduct an audit and do it effectively?” he said.

Other new incentives in the law allow governments and tax-exempt organizations to elect for the tax credits to be treated as a direct payment to the IRS. Others can transfer some of the credits one time to an unrelated third party—an area where tax professionals expect IRS probes.

For developers, the option to transfer credits will usher in more investment in the sector, providing an alternative to tax equity structures. However, it is not clear if the buyer or the seller gets audited.

The buyer claims the tax credit on the return, but they do not have any control if a project meets the requirements.

Taxpayers are deciding among themselves who bears the recapture risk, adding indemnification clauses to deals and insuring against the risks until guidance is released.

For the production tax credits, there shouldn’t be a lot of opportunity for fraud because energy production can be tracked over time, said Irina Antonache, a managing director at Moss Adams.

The IRS will pursue the clean energy tax credits “so aggressively, that it really undermines the effectiveness,” Kovacev said.