The IRS has recently added fraud involving the fuel tax credit to the list of frivolous tax claims being put forth by individuals and businesses. The credit has very defined criteria and applies generally to farmers and fisherman who use fuel for off-highway business purposes. There are some individuals who are trying to claim the credit when in fact their occupation or income level makes the claim unreasonable. If you attempt to claim a tax credit or refund, and it is not justified, you can be liable for up to $5,000 in penalties.
The tax credit is a possibility under the right, and narrowly defined circumstances. Basically, it works like this:
A federal excise tax is imposed on gasoline ($.184 per gallon), clear diesel fuel ($.244 per gallon), and clear kerosene ($.244 per gallon). The amount of these taxes may be credited or refunded if these fuels are used in many types of off-road uses. Common off-road uses include use as heating oil, use in stationary engines, use in non-highway vehicles, and use in separate engines mounted on highway vehicles.
Generally, refunds may be claimed quarterly on Form 8849, Claim for Refund of Excise Taxes. Claims not made on Form 8849 may be claimed as income tax credit on Form 4136, Credit for Federal Tax Paid on Fuel. See the forms and their instructions for specific claim requirements.
Note that a credit or refund is not allowable for the following:
- Any use in the propulsion engine of a registered highway vehicle, even if the vehicle is used off the highway
- Any fuel that is lost or destroyed through fire, spillage, or evaporation
- Any use of dyed diesel fuel or dyed kerosene. In fact, you may be subject to a substantial penalty if you use dyed fuel as a fuel in a registered diesel-powered highway vehicle
You must have records to support your claim and they should clearly establish the number of gallons used during the period covered by the claim, the dates of purchase, the names and addresses of suppliers and amounts bought from each in the period covered by the claim, the purposes for which you used the fuel, and the number of gallons used for each purpose. The supporting documents should be kept at your primary place of business.
There is also a specific scam that has been reported whereby a company representing itself as an accounting firm approaches a Canadian trucking company and suggests that the carrier may be entitled to a refund of the excise tax paid on fuel purchased in the U.S. The company itself only charges a percentage of the refund obtained to file the paperwork on behalf of the Canadian company. Unfortunately for the company being scammed, the refund on the tax is only intended for US companies. The IRS will often issue the refund and verify the validity of the application at a later date. The trucking company issues a check to the scam artists, who disappear afterwards. Once the IRS catches the fact that the refund was issued to a Canadian company, the company is expected to pay the refund back, with penalties and interest.
It is important that you look closely at the claim requirements on your tax forms to determine whether or not you are eligible to claim this credit. Since it is on the list of scams that the IRS is watching for, it would be wise to be sure it actually applies to your business before utilizing it.