Menendez Releases Inspector General Investigation Finding Fossil Fuel Companies Improperly Claimed Nearly $1B in Clean Air Tax Credits

Menendez Releases Inspector General Investigation Finding Fossil Fuel Companies Improperly Claimed Nearly $1B in Clean Air Tax Credits

Senator calls it ‘apparent failure of the fossil fuel industry to act in good faith’ citing ‘no legitimate reason’ for discrepancy, urges IRS take action

  
NEWARK, N.J, – U.S. Senator Bob Menendez (D-N.J.), a senior member of the Senate Finance Committee that sets national tax policy, today released the results of an investigation he initiated with the U.S. Treasury Inspector General for Tax Administration (TIGTA) that found fossil fuel companies improperly claimed nearly $1 billion in clean air tax credits. The senator called it an “apparent failure of the fossil fuel industry to act in good faith” and urged Internal Revenue Service (IRS) Commissioner Charles P. Rettig to take enforcement actions against these fossil fuel companies and additional steps to prevent the industry from continuing to rip off taxpayers.

Section 45Q of the Internal Revenue Code provides tax credits on a per-ton basis to companies that successfully trap, sequester and store carbon emissions, preventing them from entering the atmosphere, in compliance with the Environmental Protection Agency’s Subpart RR monitoring, reporting, and verification (MRV) requirements.

“TIGTA confirms that fossil fuel companies have for years, improperly claimed nearly $900 million worth of the 45Q tax credit,” Sen. Menendez stated in a letter to IRS Commissioner Rettig.  “Of the ten companies claiming 99.9 percent of the 45Q credits, TIGTA found that only three had the required [monitoring, reporting, and verification] plans in place with the EPA.  Additionally, while TIGTA acknowledged that the IRS had conducted audits and denied 45Q credits for a portion of these claims, hundreds of millions of improperly claimed taxpayer dollars remain unchallenged by the IRS.”

Sen. Menendez called on the IRS to take a series of steps, including conducting an audit of every fossil fuel company that previously claimed more than $10,000 in value of the Section 45Q credit, and retroactively deny any credits that were not in compliance with necessary EPA regulations.

Sen. Menendez also requested the names of all companies that have claimed the credit since tax year 2010, as well as the amount of carbon dioxide each company has claimed to have sequestered, and the value of any credits claimed. Additionally, as the IRS works to implement 45Q Credit changes, Sen. Menendez urged them to continue to enforce its own requirement that companies claiming the credit adhere to strong EPA standards, and called for the suspension of the 45Q Credit for enhanced oil recovery operations until an investigation can be completed into the industry’s misuse of the credit, and steps can be put in place to prevent future abuse.

In a previous response to a request from Sen. Menendez, the IRS acknowledged a significant discrepancy between the number of credits claimed under Section 45Q, but failed to adequately explain any legitimate reason for this discrepancy, or lay out a plan to further investigate this issue. This prompted Sen Menendez to initiate an investigation with TIGTA.

Full text of the letter can be found here and below.

Dear Commissioner Rettig:

I write to you today to follow-up on your June 28, 2019 response to my letter requesting additional information regarding the implementation and enforcement of the tax credit for carbon oxide sequestration under Internal Revenue Code Section 45Q. 

As you know, interim guidance issued by the Internal Revenue Service (IRS) in 2010 required any taxpayer claiming a credit under section 45Q to adhere to the Environmental Protection Agency’s (EPA) Greenhouse Gas Reporting Requirement under subpart RR, Geologic Sequestration of Carbon Dioxide.  While your response acknowledged a significant discrepancy between the number of credits claimed under Section 45Q, it failed to adequately explain any legitimate reason for this discrepancy, or lay out any actions that the IRS intended to take to investigate this potential fraud.  As such, I asked the U.S. Treasury Inspector General for Tax Administration (TIGTA) to initiate an investigation, which was recently completed.  I have attached TIGTA’s response to my inquiry here for your review and action.

TIGTA confirms that fossil fuel companies have for years, improperly claimed nearly $900 million worth of the 45Q tax credit.  TIGTA states that “the reason for the discrepancy is that some taxpayers have claimed the I.R.C. § 45Q credit on tax returns without complying with the EPA’s monitoring, reporting, and verification (MRV) requirements,” and “determined that for TYs [tax years] 2010 through 2019, a total of $893,935,025 (87 percent) worth of I.R.C. § 45Q credits were claimed by…taxpayers when they were not in compliance with the EPA.”  Of the ten companies claiming 99.9 percent of the 45Q credits, TIGTA found that only three had the required MRV plans in place with the EPA.  Additionally, while TIGTA acknowledged that the IRS had conducted audits and denied 45Q credits for a portion of these claims, hundreds of millions of improperly claimed taxpayer dollars remain unchallenged by the IRS.

In your June 2019 response to my initial inquiry, you also stated that “part of the discrepancy between the EPA’s and IRS’s reporting numbers may be attributable to a delay between the time taxpayers claim Section 45Q credits and the time within which an audit of those credits is resolved.”  However, TIGTA unequivocally stated that this explanation is false, writing that the discrepancy is “…not based on ongoing audits.”  It is troubling that the explanation provided by the IRS appears to lack accuracy and merit.  

Given the apparent failure of the fossil fuel industry to act in good faith when claiming Section 45Q credits, as demonstrated in TIGTA’s response, and the lack of urgency by the IRS to enforce compliance, I urge the IRS to take the following steps and provide substantive responses to each of these points no later than May 13, 2020:

1.       Conduct an audit of every taxpayer that has previously claimed more than $10,000 in value of the Section 45Q credit, and retroactively deny any credits to that were not in compliance with necessary EPA subpart RR regulations;

2.       As laid out in TIGTA’s response, “conduct a campaign or special project to examine every taxpayer that claimed the credit” moving forward to ensure that the taxpayer is in compliance with all necessary regulations;

3.       Transmit to my office in compliance with I.R.C. §6103, in writing, the names of all companies that have claimed the credit since tax year 2010, as well as the amount of carbon dioxide each company has claimed to have sequestered, and the value of any credits claimed;

4.       As the IRS works to update its guidance to implement changes to the Section 45Q credit, it must ensure that all claimants adhere to the standards contained in EPA subpart RR, including MRV requirements.  While the minority of claimants with approved EPA MRV plans have demonstrated the technical feasibility of current requirements, the widespread and improper use of the Section 45Q credit has clearly demonstrated an inability of the fossil fuel industry to self-regulate;

5.       Ensure that any new regulations hold responsible companies who made improper or erroneous claims;

6.       Suspend the use of the Section 45Q credit entirely for enhanced oil recovery operations until a full investigation on the past misuse of the credit by this industry can be conducted, and appropriate guarantees can be put in place, including those outlined above, that would prevent any future misconduct.

Thank you for your attention to this important matter, and I look forward to your prompt response.

Sincerely,

 

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