IRS rules allow car dealers to provide rebates for EV tax credits upfront

The Internal Revenue Service and the Treasury Department released guidance on how buyers of electric vehicles can transfer their tax credits to automobile dealers and get advance payments that effectively lower the cost.

Under the Inflation Reduction Act of 2022, buyers of electric vehicles can opt to transfer their new clean vehicle credit of up to $7,500 and their previously owned clean vehicle credit of up to $4,000 to a car dealer starting Jan. 1, 2024. In effect, that will reduce the vehicle’s purchase price by giving consumers an upfront down payment on their vehicle at the point of sale, as opposed to needing to wait to claim their credit on their tax return the following year. Only vehicles purchased under the consumer clean vehicle credits are eligible for the tax benefit.  

The guidance in Rev.  Proc. 2023-33 also provides information on registration requirements and how the mechanics of the tax credit transfer will work for car dealers. The guidance also includes proposed eligibility rules for the previously owned clean vehicle credit that aim to give consumers extra certainty about their ability to claim and to transfer the credit, proposing to clarify that eligible consumers can transfer the full value of the new or previously owned vehicle credit regardless of their individual tax liability. The IRS also posted a frequently asked questions page with information on the transfer of new and previously owned clean vehicle credits from the taxpayer to an eligible entity for vehicles placed in service after Dec. 31, 2023. Fact Sheet 2023-22 updates FAQs related to new, previously owned and qualified commercial clean vehicles.

“For the first time, the Inflation Reduction Act allows consumers to reduce the up-front cost of a clean vehicle, expanding consumer choices and helping car dealers expand their businesses,” said Laurel Blatchford, chief implementation officer for the Inflation Reduction Act at the Treasury Department, in a statement Friday. “The IRS has focused on streamlining this process for car dealers as part of its commitment to improving service and helping taxpayers claim the credits they are eligible for.” 

Later this month, dealers will be able to register through a new website called IRS Energy Credits Online. For buyers to be eligible to claim or transfer a tax credit starting Jan. 1, 2024, the dealer they purchase their vehicle from must first register with Energy Credits Online. The registration is also a requirement for dealers to offer consumers clean energy tax credits for qualifying products like electric vehicles. Starting in January, registered dealers can submit their sales information to the IRS and receive payment for the transferred tax credits. Dealers will also use Energy Credits Online to submit “time of sale” reports, which will confirm vehicles’ eligibility for a credit, whether or not the buyer chooses to transfer the credit to the dealer.

When a buyer opts to transfer the credit, registered dealers will reduce the purchase price of the vehicle or provide cash to the buyer. The amount provided must equal the full amount of the credit available for the eligible vehicle. When completing the sale, the dealer will electronically send information about the transfer, including a time of sale report, to receive an advance payment for the value of the credit. The IRS anticipates it will be able to issue advance payments within 72 hours. 

Tax audit problems

Separately, the Treasury Inspector General for Tax Administration released a report Tuesday on problems with the IRS’s faulty audit selection process for the EV tax credit. The Energy Improvement and Extension Act of 2008 originally created the Qualified Plug-In Electric Drive Motor Vehicle Credit, the report noted. The tax provision was later amended by the American Recovery and Reinvestment Act of 2009, and then modified and extended under the Inflation Reduction Act of 2022 and renamed the Clean Vehicle Credit. The credits of up to $7,500 help taxpayers offset the purchase of a qualifying plug-in electric drive motor vehicle. The Joint Committee on Taxation estimated the credits will cost $5 billion from fiscal years 2022 through 2026, TIGTA noted.  In response to TIGTA’s recommendations in a prior report, the IRS developed filters to identify returns with potentially erroneous Qualified Plug-In Electric Drive Motor Vehicle Credit claims. However, while the IRS has taken steps to address past recommendations, problems with the implementation of some of the filters have made the existing issues even worse. TIGTA’s analysis found that 74% of the tax returns flagged by the filter to identify non-qualifying vehicle models flagged qualifying vehicle models in error, resulting in taxpayer burden and unproductive examinations. In addition, due to issues with the filter, many claims for non-qualified vehicles were not examined. TIGTA identified 13,518 unexamined returns totaling approximately $63 million in credits potentially paid for unqualified vehicles. From 2019 through 2022, TIGTA identified 7,547 returns with credits totaling approximately $23 million that were over the allowable threshold but were not caught by IRS filters. TIGTA made five recommendations in the report, urging the IRS to review the 13,518 claims for non-qualified vehicles identified by TIGTA for potential examination; consider adding a manual review to the filter identifying non-qualifying vehicle models until future controls are in place; expand the use of invalid VIN criteria as additional information in examination selection; expand controls to identify partial credits; and review the 7,547 claims that were over the allowed threshold for their vehicle model identified by TIGTA for potential examination. 

The IRS agreed with four of the five recommendations and plans to review the identified claims, expand invalid vehicle identification number criteria for tax year 2023, and update its business rules to incorporate the legislative changes from the Inflation Reduction Act related to claims made over the allowable threshold amounts. However, the IRS disagreed with manually reviewing Qualified Plug-In Electric Drive Motor Vehicle Credit claims when the vehicle is a non-qualifying vehicle.

“The IRS relies heavily on available data to identify and select cases in the most efficient manner, and these IRA provisions will allow the IRS to obtain vehicle data to identify noncompliance,” wrote Lia Colbert, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “For example, these IRA provisions all provide that no credit shall be allowed or determined unless the taxpayer includes a vehicle identification number (VIN) of their vehicle on their tax return.”

She noted that Congress also specifically modified the Tax Code to say that omitting a correct VIN from the tax return would constitute a “mathematical or clerical error,” allowing the IRS to address it under its math error authority.