Fueling Up on Tax Credits

Your Guide to State, Local, Federal, Estate + International Taxation

Frivolous tax arguments sometimes target very specific types of tax credits.  One such fraudulent tax scheme involves the fuels tax credit.  Proponents of this scheme assert that taxpayers can claim the section 6421 fuels tax credit without regard to whether they qualify for the credit through the purchase and use of gasoline for an off-highway business.  In addition, certain promoters of fraudulent tax schemes have claimed on behalf of client the tax credit under section 6427 for nontaxable uses of fuel when the taxpayers clearly are not entitled to the credit based on the facts, such as the taxpayer’s occupation and income level, type of motor vehicle and how it is used, and the volume of fuel claimed.

The circumstances in which the credits are available are specific and limited.  The principal requirement being that the fuel be used in an off-highway business.  For example in a farming business where you may have fuel consuming items such as tractors, generators, compressors, power saws and similar equipment.  With some exceptions, fuel used in a “highway vehicle” is not going to qualify.  IRS Publication 510 (2008) Excise Taxes, defines them as “designed to carry a load over a public highway” including federal, state, county, and city roads and streets.  Passenger cars, motorcycles, buses, highway trucks, tractor trailers, etc., generally are highway vehicles.

IRS has determined in numerous cases that fuel tax credits are being claimed without regard to these requirements and often in “absurdly huge amounts that cannot possible be for the quantity of fuel expended for off-highway purposes”.  Doing so may only fuel their desire to penalize and prosecute.

Dale F. Jensen, CPA