Clean Energy Credits Must Not Become IRS Targets Under Trump Law

President Donald Trump’s signature tax-and-spending package, signed July 4, combined with a recent executive order, suggest that the new administration will make green energy tax incentives an enforcement priority.

The legislative package eliminates or greatly curtails many of the tax provisions that former President Joe Biden used to incentivize green energy.

Additionally, the $3.4 trillion tax package has a new accuracy-related tax penalty for substantial understatements of income tax due to “applicable energy credits” and even a new definition of “substantial” as a 1% understatement, when it normally means at least 10%.

Trump’s executive order declares that US policy is to “build upon and strengthen the repeal of, and modifications to, wind, solar, and other ‘green’ energy tax credits in the One Big Beautiful Bill Act.” In the order, he directed Treasury Secretary Scott Bessent to take all action he “deems necessary and appropriate to strictly enforce the termination” of certain credits for wind and solar facilities.

Will this shift in tax policy result in more IRS audits for green energy? Hopefully not.

The IRS needs to remain neutral in its administration of the tax laws. From a tax perspective, there is nothing nefarious about green energy transactions that should cause the agency to allocate excessive resources to audit more than traditional sampling and risk profiling would suggest.

The IRS was already auditing some green energy transactions under former President Joe Biden’s Inflation Reduction Act of 2022, just as it audited a sampling of transactions and issues spawned by the 2017 Tax Cuts and Jobs Act (such as opportunity zones).

The tax credits for green energy under the 2022 law created new issues, such as transferability and eligibility for bonus credits, and led to some very large transactions, so it is important (regardless of one’s politics) that the IRS pay attention.

Both sides of Congress sometimes make wild charges that the IRS is being “weaponized” against this or that, which evidences their understanding that the country is best served by a neutral and politically independent IRS.

But could the IRS audit more? Yes. It’s common for the IRS to focus its limited resources on specific issues because it’s much easier to train and equip revenue agents on discrete issues than it is to task them with holistic full-enterprise, comprehensive audits.

And while enforcement resources are once again in decline (perhaps to levels not seen in several decades), it wouldn’t be too burdensome for the IRS to touch a significant percentage of green energy projects simply because it’s a relatively small universe. One clean energy group counted 362 new projects between August 2022 and the beginning of Trump’s second term.

The IRS still has time to audit many of the companies that have claimed the expanded clean energy tax credits from 2023 onward. The IRS normally has three years to audit, although it typically refrains from beginning an audit close to the three-year deadline.

What does a green energy audit look like? The IRS generally has standardized its requests for information during examination of a green energy project. The issues are well known, although the new tax law is likely to present some novel issues for the IRS to look at.

The goal is to resolve green energy audits, as with any audit, as quickly as possible without changes—certainty has value in the tax world. While the reduction in IRS staff could make audits last longer, in our view, that decline actually may support speedier resolutions.

The reduction in resources makes what’s left ever more valuable, such that both the IRS and taxpayers should consider resource consumption as an important factor in defining audit scope and in how to promptly resolve any identified issues.

Taxpayers also have a role in audit speed, and green energy audits can present some challenges to keeping things on pace given the number of possible participants on the “taxpayer” side (such as buyers, sellers, and tax insurance), which requires careful collaboration.

The best examination obviously is the one that doesn’t occur. Next best is the examination that, because the taxpayer is prepared and well represented, goes smoothly and ends somewhat quickly.

In most cases, much of the substantiation that the IRS may request will have been collected, analyzed, and perhaps negotiated as part of the due diligence process. However, the IRS’s final credit transfer regulations only require eligible taxpayers to supply transferees with “required minimum documentation.”

Taxpayers should realize that “minimum” won’t be enough if the IRS begins an audit. In those few cases where front-end due diligence may not have been particularly thorough, it would be wise to coordinate information and responsive documents that may also uncover examination vulnerabilities that need to be addressed.

In the case of any audit—and green energy audits are no exception—it is far better to uncover vulnerabilities before rather than after the IRS comes knocking at the door.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Tom Cullinan, a shareholder at Chamberlain Hrdlicka, previously served as an adviser IRS commissioner and acting IRS chief of staff.

John Hackney is a shareholder at Chamberlain Hrdlicka specializing in federal and state tax controversy matters.

Charles Rettig, a shareholder in Chamberlain Hrdlicka’s tax controversy and litigation practice, was IRS commissioner from 2018 to 2022.

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