If you do a web search for “tax brokers,” you’ll find dozens of companies willing to act as intermediaries between those who have legally obtained tax credits but have no tax liability and those who want to buy them. The problem with transferable tax credits is that it opens up the possibility of fraud, as highlighted by recent news in Oregon and Louisiana.
In Oregon, members of the state legislature, including State Sen. Whitsett (R), wrote a letter to the Oregon Attorney General detailing several allegations against the Oregon Department of Revenue and Oregon Department of Energy concerning the Business Energy Tax Credit (BETC). Although the credits issued under the BETC are transferable, regulations dictate the price of the credits when sold. The Whitsett letter alleges that state employees assisted in the sale of tax credits outside of the regulations and without properly reporting the sale of credits. The letter also alleges that state employees may have leveraged the tax credits for personal gain.
The BETC was repealed in 2011 but taxpayers could receive certification for the credits until July 1, 2014, provided that they could prove construction began prior to April 15, 2011. The credit had a lot of potential value, providing credits for up to 50 percent of the cost of a facility to a maximum of $20 million for a facility that produces renewable energy or for high-efficiency combined heat and power facilities. According to The Oregonian, Oregon awarded at least $857 million in credits since the program began.
Although credits are no longer available under the program, credits already obtained can be carried forward up to eight years. Tack on the fact that the credits are transferable, provided the original owner has not used the credit, and you can easily see why an expired credit is still relevant. The main problem, from the taxpayer’s perspective, is also highlighted by The Oregonian. For taxpayers who can’t use the credits, the mandated selling price is too high to find a buyer. Gov. Kate Brown has requested that the price of the credits be lowered so that taxpayers saddled with the credits can get rid of them.
Meanwhile in Louisiana, the saga of United States v. Hoffman continues. The defendants in the Hoffman case used false expense reports in order to obtain Louisiana Motion Picture Infrastructure Credits. The defendants were partially acquitted of charges, according to The Times-Picayune.
Louisiana’s film credits and Oregon’s renewable energy credits shared some commonalities that increased the potential for fraud. The states both awarded hundreds of millions of dollars in credits and the credits were transferable to other parties. This forced Louisiana to make changes to their film credit program.
Tax credits are big money and people will continue to find ways to abuse them. When credits are easily transferred to other parties, it provides a big incentive for those who normally would be unable to use the credits to still apply for them in hopes of selling them later. Fortunately, as more states realize the potential for fraud in tax credits, they can take measures to prevent illicit use of the credits.
Continue the discussion on LinkedIn: What can states do to mitigate the risk of fraud when issuing tax credits?
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