Tax credits for buying a new Tesla in the U.S. are winding down at year-end.
FREDERIC J. BROWN/AFP/Getty Images
Is your car eligible for a $7,500 green tax break? Maybe. Maybe not. In a new audit report, the Treasury Inspector General for Tax Administration found that millions of dollars in potentially erroneous plug-in tax credits are being claimed for ineligible vehicles on income tax returns—to the tune of $82 million from tax years 2013 through 2017.
“[T]he IRS is allowing individuals to inappropriately reduce their tax liabilities, resulting in the loss of millions in revenue,” says the TIGTA report: Millions of Dollars in Potentially Erroneous Qualified Plug-In Electric Drive Motor Vehicle Credits Continue to Be Claimed Using Ineligible Vehicles. “If controls were in place or the returns had been reviewed, potentially, claims totaling $81.7 million may have been disallowed.”
What’s galling is that back in 2011 the IRS watchdog identified the problem and offered solutions, as Forbes’ Janet Novack reported in “Electric Car Shocker: 20% Of Plug-In And Hybrid Tax Credits Wrongly Claimed.”
It turns out the IRS has been continuing to allow erroneous claims of the plug-in credit as “many of the deficiencies identified still exist,” according to the report. In about 7% of cases that TIGTA investigated, the taxpayers (individuals or leasing companies) were not entitled to credits claimed.
How does the tax break work? For vehicles acquired after December 31, 2009, the credit is worth up to $7,500—that’s a dollar-for-dollar reduction of your tax liability. The idea behind the credit was to encourage individuals and businesses to trade in their gas guzzlers and go green. It applies to 100% electric vehicles as well as plug-in hybrids (cars, SUVs, and trucks can all qualify). The U.S. Department of Energy keeps an official list of eligible vehicles, along with a link to state tax breaks too.
The credit is set up to phase out when each manufacturer has sold at least 200,000 vehicles in the U.S., dropping to $3,750 for the next two quarters, then $1,875 for two quarters. Teslas, for example, will no longer qualify for a credit after December 31, 2019. General Motors vehicles qualify through March 31, 2020. But many other manufacturers are just ramping up production of electric vehicles. The Joint Committee on Taxation estimates that the plug-in credit could cost the Treasury $7.5 billion over a five-year period (fiscal years 2018 through 2022). With more vehicles out there, there’s more potential for erroneous credits and a greater cost to the Treasury.
Should there even be a tax break for buying an electric car? The Trump administration budget calls for eliminating the plug-in credit. On the other hand, the Driving America Forward Act would extend the life of the credit by expanding the phaseout to 400,000 more vehicles per manufacturer. That would be good news for Tesla, GM, Nissan, Ford and Toyota—and their customers.
In the meantime, TIGTA has recommendations for the IRS.
Use VINs to ferret out cheaters! After the 2011 TIGTA report, the IRS required taxpayers to list the vehicle year and VIN (vehicle identification number) on Form 8936—that’s the form you attach to your 1040 income tax return to claim the credit. VINs indicate the engine and fuel type. Going forward, the IRS plans to use data analytics to cross-check the reported VINs with third-party databases showing what VINs qualify for the credit and initiate audits where discrepancies are found.
If you already filed a tax return claiming a plug-in credit, you might be hearing from the IRS. One of TIGTA’s recommendations that the IRS agreed with is for the IRS to develop a compliance program and take appropriate enforcement action(s) on the returns identified in the TIGTA report where the statute of limitations hasn’t run.