Complex tax break on hybrids causes headaches for IRS

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Some taxpayers erroneously claimed an alternative motor vehicle credit on leased cars, tried to claim it for cars that did not qualify, or claimed more than the maximum $3,150, according to a new government report.

"We reviewed claims for Alternative Motor Vehicle Credits of more than $4,000 each claimed by 420 taxpayers who filed their returns electronically. We found 15 percent of these taxpayers (61 of the 420) either claimed non-qualifying vehicles, claimed qualifying vehicles at amounts higher than the amount allowed, or did not provide the required data to support their claim," said an audit report released Monday by the Treasury Inspector General for Tax Administration (TIGTA). "Nevertheless, their claims were allowed by the IRS." Among the claims were two recreational vehicles. Twenty-one of the taxpayers made claims for $1.8 million more than they should have, reducing their tax liabilities incorrectly by $33,156, the report said.

The complexity of the Alternative Motor Vehicle Credit, designed to provide incentives for taxpayers to "go green" by buying energy-efficient vehicles, created some confusion. The form (8910) and instructions did not clearly inform taxpayers that the credits applied only to vehicle owners. In a sample of three states' records, 22 percent of taxpayers who leased vehicles erroneously claimed a total of $37,731 in credits, the report said. The IRS quickly fixed the documents after TIGTA raised the issue.

"The erroneous claims for the credit were allowed because the IRS did not establish sufficient controls during the processing of tax returns to ensure that claims were only allowed for qualified vehicles, and that the amounts claimed were correct," according to the report.

The report also said some taxpayers did not provide the needed paperwork to support their claims.

The credit is phased out over time after 60,000 vehicles are sold. The law requires taxpayers to provide the IRS with documentation regarding how much of the credit they are entitled, based on sales figures at the time they bought the car, although manufacturers were not required to provide the IRS with similar documentation. The onus is on the taxpayer, the report said.

TIGTA recommended the IRS establish criteria to select questionable claims for review. Legislation requiring the seller to provide the purchaser and the IRS with documentation may be considered, the report said. The IRS agreed with the recommendations.

The Joint Committee on Taxation estimated that the tax could save taxpayers who bought qualified vehicles $874 million in taxes over the next decade.

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