In an apparent reversal of course in response to concern that taxpayers are overinflating their costs for eligible renewable energy projects, the IRS recently announced it may audit certain renewable energy projects that receive a cash grant in lieu of tax credits under Section 1603 of the American Recovery and Reinvestment Act.
Section 1603 of the American Recovery and Reinvestment Act of 2009 allows a taxpayer to elect to receive a cash grant payment of up to 30% of the eligible basis of certain renewable energy property, in lieu of the 30% tax credit offered for investment in such projects. To receive the cash grant, the taxpayer must submit an application to Treasury demonstrating that construction began on the project before the end of 2011. Upon receipt of a completed application, Treasury is directed to pay out the cash grants within 60 days after the application is received or the project is placed in service, whichever is later.
As expected, the announcement that IRS has the authority to challenge the amount of a previously paid award came as a surprise for many, given that the agency previously had little or no discretion to audit such awards.
In its announcement, IRS stated that “excessive payments” (payments that are ultimately disallowed because all or a portion of the qualifying project was not eligible for a 1603 grant) must be included in the recipient’s gross income in the year they are received (notwithstanding the general exemption set forth in Internal Revenue Code Section 48(d)(3)(A)). The recipient can then deduct any ultimate repayment in the year such repayment is made. Notwithstanding the foregoing, if the excessive payments are repaid in the year they are received, there is no gross income inclusion and no deduction.
Accordingly, if IRS chooses to audit an award, a significant portion of the grant can be lost if the IRS deems it in excess. Perhaps even more disconcerting is the fact that a court could conclude that an audit by IRS is a discretionary, federal action, which decision could bring several other federal laws into play- including the National Environmental Policy Act – which could have significant monetary and other impacts for the taxpayer applicant.