New audit points to fraud potential in tax credit program for biofuels

A new federal audit has revealed a surprising claim about biofuel tax credits: One third of the credits sampled by investigators lacked the required documentation, meaning the claims should not have been allowed.

The Treasury Inspector General for Tax Administration, or TIGTA, examined compliance procedures at the Internal Revenue Service and said after sampling 124 taxpayers claiming biofuel credits, 42 had not submitted the proper documentation. The erroneous claims in the sample, which included credits for alternative fuels (like liquified petroleum gas) and biodiesel, amounted to more than $30 million out of the roughly $252 million in credits claimed in the sample.

TIGTA also made this extraordinary statement:

Under current law, the IRS could only address these claims after the tax returns are filed and examined and a notice of deficiency is issued. TIGTA recommended the administration develop a legislative proposal to ensure that claimants are entitled to the credit and are properly registered or supply the appropriate documentation along with their tax returns.

Critics of biofuel credits already claim the program is rife with potential for fraud. And even TIGTA, while cautioning the sample in the audit should not be extrapolated to the entire program, said ever since Congress enacted legislation creating biofuel tax credits in 2004, “the IRS has been susceptible to significant fraudulent schemes that have resulted in the payment of erroneous refunds.”

Last year, five people were sentenced to prison in a yearslong conspiracy in which the Justice Department said they had fraudulently claimed more than $1 billion in refundable renewable fuel credits. The IRS ultimately paid out more than $511 million to a Utah biodiesel company that was owned by two of the conspirators.

In Iowa, we tend not to hear much about such things. Our congressional delegation is famous for pumping out press releases touting their advocacy for biofuel credits, but we rarely hear from them when it comes to misuse of the credits. Still, one would think our representatives would be alarmed that documentation is lacking on many of these claims, and that the IRS doesn’t even have the legal authority to require the appropriate proof of eligibility be attached to the claimants’ tax forms when they are filed.

It seems like a loophole a congressman would rush to fix.

Needless to say, people illegally claiming biofuel credits hurt those in the industry who are playing by the rules. In addition, revelations like those in the TIGTA report give ammunition to critics who would like to see tax credits like these killed.

A recent article on the website of the Cato Institute highlighted the report and said with the new subsidies included in the Inflation Reduction Act of 2022, “Congress should expect fraud and ballooning costs to continue.” The article concluded by saying: “Every energy tax credit should be repealed. They are economically destructive, have proven enforcement problems, and create unexpected financial risks to federal budgets.”

This is no small pot of money. The Inflation Reduction Act extended biofuel tax credits through the end of this year, and the congressional Joint Committee on Taxation estimates taxpayers will claim $5.6 billion in these credits from 2023 to 2025. TIGTA said with the passage of the law there is an even “greater incentive” to take advantage of these credits and make fraudulent claims.

Subsidies for biofuels have long drawn criticism outside of farm states like Iowa, even as they have enjoyed broad bipartisan political support here. Sure, there are some conservatives who have never liked them for philosophical reasons, but the major parties have generally been supportive.

Lately, however, some on the left in Iowa — activists, if not lawmakers — are taking a more jaundiced eye toward government subsidies that help agriculture. They see big farming operations gobble up much of the money and contribute to our state’s deteriorating water quality. And they’re irritated Republicans routinely attack programs they support — like SNAP and the federally-funded summer meals program that Gov. Kim Reynolds killed.

Why support farm subsidies, they say, when their priorities, like hungry children, aren’t valued by Republican politicians who are supported by those who mostly benefit from these subsidies?

Fraud is in nobody’s interests. Obviously, it’s not good for taxpayers, nor the people and businesses who have a legal right to claim these biofuel subsidies. It’s also not a good thing politically. If the right safeguards aren’t put in place, support for these tax credit programs will suffer. And it won’t just be among the usual critics who target them. Even those who have historically been on board just might find enough reason to jump ship.