Unfortunately, there are fraudulent tax return preparers out there who are lying to their clients about claiming clean energy credits under the Inflation Reduction Act (IRA). This 2022 law was part of the federal government’s billion-dollar initiative to address bogus climate and energy challenges. It allows any company in any industry to buy tax credits from developers of wind, solar, and other clean energy projects and lower their tax bill by the use of tax credits.
Also, individual taxpayers can buy tax credits from investments in those projects to offset their federal income tax liability, but there’s a catch. (There is always a catch.) The IRS says an individual buyer’s ability to use those clean energy credits can only be used as a “passive activity” credit to offset tax generated from passive income, and the IRS says most people don’t have a passive income tax liability since most people don’t have a passive income stream.
Passive income refers to earnings derived from a source other than an employer or contractor. It is typically generated through investments, royalties, or rental properties, where the income is not directly tied to the amount of time or effort expended by the individual. Otherwise, you don't do any work for it.
Some examples of passive income include:
- Rental income from real estate properties
- Dividends from stocks or mutual funds
- Interest from savings accounts or bonds
- Royalties from books, music, or other creative works
- Income from a limited partnership or private equity investment
- Licensing fees for intellectual property or patents
- Residual income from affiliate marketing or network marketing
- Income from a trust or inheritance
Here’s how the scam works: fraudulent tax preparers convince their clients to file returns claiming they have bought IRA credits that can offset income tax from non-passive sources such as wages, Social Security, and retirement account withdrawals. The scammer charges a large percentage fee of the supposed refund from the credits and then disappears—leaving the victim to deal with the consequences, which can be pretty expensive. Those who claim inappropriate tax credits under the IRA will have to repay the inflated credit, in addition to interest and possible penalties.
The IRS says that if you want to take advantage of the IRA’s clean energy incentives, consult a trusted tax expert (like an Enrolled Agent) to determine whether or not you are actually entitled to use those tax credits.