Excessive Claims for Fuel Tax Credits Makes the IRS "Dirty Dozen List"

Published on: 12:54PM Feb 06, 2015

The IRS just released a bulletin yesterday announcing that filing tax returns claiming excessive amounts of fuel tax credits is now on their "Dirty Dozen" list of tax scams for the 2015 filing season. We find that most farmers purchase fuel that is exempt for state and federal gas taxes for those gallons that are consumed on the farm directly. However, many purchases of fuel (especially gasoline) are consumed on the farm and have federal gas taxes included in the purchase.

For these gallons, a farmer is entitled to claim a fuel tax credit on Form 4136 when preparing their income tax return. This credit is allowed as a direct reduction of the income tax owed and unlike many other credits the taxpayer is entitled to the refund even if they owe no income tax. This is probably why it makes the list of "Dirty Dozen" scams since it is very easy for unscrupulous tax preparers to have filers owe no tax, yet claim large amounts of fuel tax credits for fictitious business operations.

During some of my farmer audits, a question is usually asked regarding fuel tax credits, however, usually the auditor is only concerned whether the credit is reflected on the following year's schedule F as income. Based on this new release, if your fuel tax credit exceeds a certain amount, the auditor is likely to request all supporting documents regarding the payment of the tax and where those gallons were consumed.

This just adds additional paperwork and complexity due to a few bad eggs.