Nearly $5 billion in qualified tax credit bonds were issued in 2009 and 2010, resulting in millions of dollars of bond tax credits claimed each year. In a heavily redacted report, the Treasury Inspector General for Tax Administration (TIGTA) has reported on its analysis of corporate and individual returns with claims for bond tax credits. TIGTA found that more than $700 million in bond tax credits were claimed in 2010 and 2011.
The TIGTA report explains that after changes to the law in 2008 allowed bond tax credits to be stripped from the bonds and sold to other investors who could use the credits to reduce their tax liability, the sale of tax credit bonds moved from primarily being privately placed with large financial institutions to being sold on the open market.
Additionally, financial institutions purchased bonds to use the credits to reduce their tax liabilities, but with the downturn of the economy many found they also had less taxable income and could not use the bond tax credits to reduce tax liability. Also, mutual funds started investing in tax credit bonds, and the legal changes allowed them to pass the credits on to their investors. TIGTA reports that these changes increased the risk of fraud because the population of taxpayers holding the credits became more diverse, multiple taxpayers might improperly or fraudulently claim the same credit, and there were no requirements to report to the IRS on the stripping and transfer of the credits. Anticipated information reporting requirements were discussed in Notice 2010-28 but the new Form 1097-BTC reporting was not required until the first quarter of 2013.
The TIGTA report discloses that the IRS plans to perform an analysis of the population of bond tax credits. The findings will be considered in determining any changes needed to enhance the compliance strategy for detecting improper or fraudulent claims for bond tax credits. The redacted TIGTA report is available on the TIGTA website at http://www.treasury.gov/tigta/auditreports/2013reports/201310060fr.pdf.