In July 2024, the IRS released several warnings on widespread scams and misleading claims on the Self Employment tax credit. The IRS is taking a proactive communication approach and raising awareness of scams, fraud and other misleading information on social media and by different promoters.

 

  • Clean Energy Tax Credit – In the IR-2024-182, the IRS indicates that “unscrupulous tax return preparers are misrepresenting the rules for claiming clean energy tax credits under the Inflation Reduction Act (IRA)”. The main issue is regarding the transferability provisions of the IRA as tax preparers are claiming that the taxpayers are purchasing clean energy credits, and they are improperly offsetting certain types of income, such as wages, Social security, etc. which is not allowed as there are certain passive activity rules (i.e. Generally, you cannot offset passive income against earned income , or “active”, unless under certain income thresholds and other requirements). There is an excellent article in The Tax Adviser regarding the titled the “Recapture considerations…” which describe the monetization of the investment tax credited, how structures were created in the past, but with the IRA, it allows the transferability of the credit and subsequent monetization to then, discuss the recapture rules. In simple terms, someone that might not be able to utilize the tax credit of $100 (i.e. tax liability of only $20) could sell “or transfer” the exceeding $80 of that credit and then fill out all the forms and meet all processing requirements.
    • On a related note, another government agency, the Federal Trade Commission, released a post “Don’t waste your energy on a solar scam” in August 2024 to avoid solar energy scams from companies that seem affiliated with the government or utility companies (impersonating reputable entities). Also, these bad actors seem to misrepresent the cost of improvements, savings, financing options, and even tax savings. The FTC reminds the public that “while tax credits, rebates, and incentives might be available for solar purchasers who qualify, offers for “free” or “no cost” solar panels are scams.” In some cases, the solar company (like Ygrene in California) set liens that made harder for the customers to sell their homes. The FTC announced that “The settlement required Ygrene to dedicate $3 million dollars to help remove those liens placed on without consumers’ consent and provide monetary relief to the people impacted.”
    • Additionally, a few weeks later, the IRS has shared statistics in August 2024 on Residential and Energy Efficient Home improvement credits in the IR-2024-202 [Also, part of the Inflation Reduction Act (IRA)], which seems to be claimed appropriately by the taxpayers due to relatively smaller individual credit amounts – “Taxpayers have claimed more than $6 billion in credits for residential clean energy investments—which include solar electricity generation, solar water heating and battery storage—and more than $2 billion for energy efficient home improvements — which include heat pumps, efficient air conditioners, insulation, windows and doors — on 2023 tax returns filed and processed through May 23, 2024”. Note that there are Excel tables with the breakdown on the claimed credits per category and other factors.

 

  • Self Employment Tax Credit or COVID-19 Sick and Family Leave Credits – In the IR-2024-187, the IRS indicates that “… there is inaccurate information suggesting many people qualify for the tax credit and payments of up to $32,000 when they actually do not”. There are using a catchy name “Self Employment Tax Credit” for a highly complex credit trying to fool taxpayers and not disclosing the extremely limited eligibility scenarios and the need to file an amended return with Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals.
    • This tax credit is truly four separated credits for 1)Credit for Sick Leave and 2)Credit for Family Leave for a) Q1 period and b)Q2 & Q3 period (so 1a – max. credit $5,110 , 2a max. credit $10,000, 1b – max. credit $5,110 and 2b – max. credit $12,000 for a total of 4 credits with a max. value of $32,220). The sick leave is if you were not able to work for up to 10 days and subject to numerous eligibility requirements (from 6 to 12 reasons depending on the period). The family leave is if you were not able to work due to your son or daughter not able to go to school or daycare due to COVID 19 restrictions. Note that this credit is for 2021 (pandemic started in 2020) so at this point is much more difficult to meet the reasons listed in the IRS rules and extensive documentation supporting your claim should be kept.

Unfortunately, these credits are highly complex, and the forms are relatively new (IRA was signed in August 2022 and the Covid credits were released from 2020) so there has been a lack of knowledge from some tax preparers and also room for fraudulent tax filings from bad actors. At the end of the day, the IRS plans to go after the dishonest tax return preparers and you can report “ … an abusive tax scheme or a tax return preparer, people should use the online Form 14242 – Report Suspected Abusive Tax Promotions or Preparers, or mail or fax a completed Form 14242 and any supporting material to the IRS Lead Development Center in the Office of Promoter Investigations  Stop MS5040   24000 Avila Road  Laguna Niguel, California 92677 3405 or Fax: 877 477 9135.”

However, the taxpayer is liable for the fraudulent claim (remember the taxpayer signs the tax return) and there could be hefty penalties. Remember that some of these dishonest tax preparers can a) become ghost preparers and b) leverage the use of social media to disinform potential clients. Reach out to a reputable tax preparer and avoid falling for any of these scams.

IRS Link Ghost preparers – IRS urges taxpayers to not fall prey to untrustworthy tax preparers; “ghost preparers” can disappear with taxpayer cash, information

IRS Social Media advice – Taking tax advice on social media can be bad news for taxpayers; inaccurate or misleading tax information circulating

Link The Tax Adviser – Recapture considerations for Inflation Reduction Act credits