Friday, May 20, 2011


A “tweet” from NATP led me to “IRS Can’t Tell Who Deserves Energy Tax Credits” by Michael Cohn at ACCOUNTING TODAY.

According to the item -

The Internal Revenue Service cannot determine whether taxpayers claiming Residential Energy Credits are actually entitled to them, according to a new government report {from the Treasury Inspector General for Tax Administration, aka TIGTA – rdf} that found the tax credits going to hundreds of prisoners and minors.”

Why? Because “the IRS does not require individuals to provide any third-party documentation to support the purchase of qualifying home improvement products and/or costs associated with making energy efficiency improvements and whether these qualified improvements were made to their principal residences.” Not so much that the IRS does not require documentation – Congress did not require it as part of the legislation creating the credit.

Michael tells us that -

More than 6.8 million individuals claimed more than $5.8 billion in Residential Energy Credits on tax year 2009 tax returns processed through December 31, 2010.”

In a “statistically valid” random sampling of returns claiming the credit TIGTA “identified 362 ineligible individuals who were allowed to erroneously claim $404,578 in Residential Energy Credits on their tax returns. These individuals, including 262 prisoners and 100 individuals under the age of 18, were allowed to erroneously claim these credits because the IRS did not develop a process to identify prisoners or individuals who are too young to buy a home. The IRS has data that could have been used to identify these erroneous credits.”

The problems sound similar to those encountered with the First-Time Homebuyer Credit before Congress required back-up documentation be submitted with the claim. In fact the problems discussed in the TIGTA report are common to most tax credits, and, for that matter, tax deductions. Applying for these benefits is as easy as entering a number on your 1040 – there are no checks and balances.

The only check and balance is the integrity of a tax professional if the return is done by a paid preparer. This puts an added burden on tax preparers, who must not only gather information from the client and put it on the return properly, but must also determine if an individual is entitled to a government welfare or other benefit.

In a recent post at DON’T MESS WITH TAXES Kay Bell, the Yellow Rose of Taxes, reminds us - “There are many, many tax expenditures -- losses to the U.S. Treasury from certain tax deductions, exemptions or credits -- that account each year for an estimated $1.1 trillion in forgone government money.” Discussions on, and proposals for, tax reform have concentrated on eliminating many, or most, of these “tax expenditures” from the Code.

However, the initial purposes behind these various tax expenditures that overpopulate our current tax system are not necessarily bad. What is bad is the use of the Tax Code to distribute these benefits.

There is nothing wrong with the basic concept of “rewarding” or “assisting” low income individuals for working – the Earned Income Credit. It is “more better” to have an individual with a family work at a lower paying job then to sit home on their arses and continue to partake of the public trough.

Continuing education, beyond the basic K-12, be it in college or a trade school, should be encouraged – the various education tax benefits. The more educated the populace the better decisions they will be able to make socially and politically (or so we assume) and the more money they will be able to earn, and put back into the economy.

The purchase of energy efficient equipment and materials helps to save the environment. But if only certain equipment and materials, with specified energy efficiencies, are encouraged it is more effective to have a direct “grant” or “discount” applied to the purchase of qualified equipment and materials at the point of purchase, when the specific efficiencies are easily determinable based on model number, then to require a tax professional to waste valuable time pouring though government regulations and product lists to determine if an item qualifies when the client/taxpayer has not received or saved a “Manufacturer’s Certificate”, and in the end give up and claim the credit just in case it qualifies and leave its verification to the possibility of an audit.

If the Tax Code were to be “cleansed” of offending tax expenditures it does not mean that the government will automatically put an additional $1.1 Trillion in the bank. It just means that a lot more individuals will pay their share of federal income tax, and yet many will at the same time continue to receive government subsidies or benefits for specific “encouraged” activities. But the benefits will be distributed through the proper channels as student financial aid, Aid to Families with Dependent Children, upfront discounts for energy-saving purchases, etc.

The benefits that had previously been distributed via the Tax Code will be distributed directly to beneficiaries or providers out of the budgets of the appropriate departments, with the appropriate safeguards and required documentation - as they should be.

Having a benefit directly distributed via the appropriate government agency (other than the IRS) is “more better” for the beneficiary – it is better to get a subsidy up-front than to have to pay the money out of pocket yourself and wait a year or two to get the money back via a tax refund. If a student qualifies for a $2,500 tuition and fee “subsidy” it is better to have the money paid directly to the school by the government, and reduce the need to borrow.

And having a benefit provided at the “point of purchase” allows the appropriate government agency to more adequately and properly verify that the “purchase”, and the purchaser, does indeed qualify for the benefit – so it is also “more better” for the government.

The Cash for Clunkers program proved that government benefits to encourage desired behavior could be successfully distributed through the “proper” channels – channels other than the Tax Code - and with a lot less fraud (this is my perception/assumption – I have not done extensive research on the program).


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