Tax Tip Tuesday: Fuel Tax Credit Fraud

Stephen Fishman

Tax expert and contributor MileIQ

April 26, 2016

Self-employed workers and small business owners should always be on the lookout for tax credits but getting overzealous with these can lead to stiff penalties from the IRS. The IRS has warned about the fuel tax credit fraud, so let’s dive into what this means.

What Is The Fuel Tax Credit?

As you undoubtedly know, the federal government taxes gasoline, diesel fuel, kerosene, alternative fuels, and certain other types of fuel. However, businesses that use certain types of vehicles or equipment off-road (that is, not on highways or roads) or in farming may qualify for a fuel tax credit to defray the cost of these taxes that they must pay at the pump.

The credit is available only for non-highway vehicles. For example, a professional gardener could claim the credit for fuel use to power his lawnmowers. The credit is not available for passenger automobiles, motorcycles, buses, or highway-type trucks and truck tractors.

Individuals and businesses that purchase fuel for these purposes can claim the tax credit by filing IRS Form 4136, Credit for Federal Tax Paid on Fuels.

How To Avoid Fuel Tax Credit Fraud

Since the credit is limited to off-road commercial uses of non-highway vehicles, it is not available to most taxpayers. However, the IRS has seen a big rise in the number of fraudulent (or mistaken) fuel tax credit filings.

Unscrupulous tax preparers have enticed many taxpayers to erroneously file Form 4136 to claim the credit to inflate their tax refunds. This can lead to big trouble. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000, as well as other penalties and interest.

To help stop this growing fraud, the IRS has taken additional steps to identify returns for review that claim fuel tax credits. For more information on the fuel tax credit, see IRS Publication,550, Excise Taxes.