Golden Hammer: Erroneous IRS tax credits for improvements build up to billions

Good news if you want to make improvements to your home or business: The government can help you pay for it, even if you don’t qualify.

In fact, federal investigators found that Internal Revenue Service oversight is so bad that the agency handed out more than $1 billion in tax breaks during 2011 to people who shouldn’t have been eligible.

The problem lies with the General Business Credit, a tax break for companies that make improvements deemed to be in the public interest, such as installing wheelchair ramps, making energy-efficient improvements or opening a child care center for employees.

But individuals mistakenly have been applying for the credit as well, investigators said, and have received hundreds of millions of dollars in tax breaks meant for businesses.

“As with other tax credits, the General Business Credit serves a useful purpose and the IRS must prevent its abuse,” said J. Russell George, head of the IRS internal watchdog, the Treasury inspector general for tax administration. “In these difficult fiscal times, it is imperative the IRS develop processes to identify unsupported and potentially erroneous claims.”

For allowing individual taxpayers to claim a tax break made for businesses, the IRS wins the Golden Hammer, a weekly distinction awarded by The Washington Times to examples of fiscal abuse and mismanagement.

Officials at the IRS said they agreed with the inspector general’s assessment and would begin looking at ways to improve oversight.

“An evaluation of our compliance strategy will be completed to identify systemic and operational changes to improve detection processes,” a response from the agency said. “We will review those claims, as well as any similar first-time claims made on 2012 returns by taxpayers not included in the 2011 analysis.”

The vast majority of the waste investigators found lies in incentives for energy efficiency projects. It turns out that ordinary homeowners have been applying for the General Business Credit designed to spur energy-efficient homebuilding by construction companies and contractors.

Taxpayers can get a separate special credit for making energy-saving improvements to their own homes, capped at $500. But instead, many have been applying for the General Business Credit, which doesn’t have a limit. It’s supposed to be based on how many energy-efficient houses the companies build or sell.

That means individual taxpayers have been getting breaks in the tens of thousands of dollars — levels meant for companies, not a single household. The IRS even received 22 tax returns from individuals requesting more than $10 million in tax credits each — which were granted.

Altogether, the inspector general thinks, the IRS handed out $1.2 billion in erroneous tax breaks, though it wasn’t all claimed in 2011. Taxpayers can carry the credits forward and potentially get savings for up to 20 years.

It looks, however, like taxpayers aren’t taking advantage of that, which has helped keep down potential waste. As of June, 2013, only 65 people had carried over credits worth $195 million.

Applying for the wrong tax credit and not carrying it over from year to year shows that the whole situation is likely the result of errors on the part of people filling out personal tax forms, investigators said.

“The calculations to determine the credit amount for many of the tax returns are excessively overstated, which may be a result of taxpayer confusion in calculating the credit,” the inspector general said. However, the watchdog redacted what exact mistakes it believes taxpayers made, saying the information could be used by people trying to avoid paying taxes.

Despite “taxpayer confusion,” the inspector general said, the IRS should have caught the mistakes before forfeiting a potential billion dollars in revenue.

The General Business Credit also gives breaks to companies that install handicap-accessible additions such as ramps. Oversight for that part of the program was good, investigators said, and very little money was given to ineligible entities.

“However, despite the success of this criterion for identifying potentially erroneous claims, the IRS does not use this criterion to identify other questionable General Business Credit claims,” investigators said.

Once again, because of concerns that people could take advantage of the oversights, the inspector general did not say what action or program was so successful in stopping disability improvement payments but not in energy efficiency payments, and officials declined to give further information to The Washington Times.