Section 45Q carbon capture tax credits and EPA reporting

Over $893 million in U.S. federal tax credits claimed for carbon capture and sequestration between 2010 and 2019 were claimed by taxpayers who failed to report sequestration activities to the Environmental Protection Agency, according to an investigation by the U.S. Treasury Department. The findings could lead to changes in how IRS administers and enforces its tax credit programs, and could also have implications for the enactment of future tax credits.

At issue is the federal tax credit under Section 45Q of the Internal Revenue Code, available for certain projects that capture, use, and sequester carbon emissions. Interim guidance issued by the Internal Revenue Service in 2010 required any taxpayer claiming a credit under section 45Q to adhere to the EPA's Greenhouse Gas Reporting Requirement under subpart RR, Geologic Sequestration of Carbon Dioxide. Subpart RR requires facilities that conduct geologic sequestration by injecting CO2 for long-term containment in subsurface geologic formations to report basic information on carbon dioxide received for injection, develop and implement an EPA-approved site-specific plan for monitoring, reporting, and verification (MRV), and report the amount of carbon dioxide geologically sequestered using a mass balance approach and annual monitoring activities.

But on November 19, 2019, U.S. Senator Bob Menendez, a Democrat from New Jersey who sits on the Senate Finance Committee, asked the office of the U.S. Treasury Inspector General for Tax Administration to undertake a review of "discrepancies" between the amount of Section 45Q tax credits that have been claimed and the amount of sequestered carbon reported to the EPA under subpart RR.

In a reply dated April 15, 2020, J. Russell George addressed six questions posed by Senator Menendez, replying in part:

The reason for the discrepancy is that some taxpayers have claimed the I.R.C. § 45Q credit on tax returns without complying with the EPA’s monitoring, reporting, and verification (MRV) requirements." The reply notes that out "of 672 taxpayers that reported carbon dioxide sequestration to the IRS, 10 taxpayers (one and a half percent) claimed over $1 million each, with their claims totaling over $1 billion (99.9 percent) of all of the I.R.C. § 45Q credits. We reviewed these 10 taxpayers and determined that three currently have an approved MRV plan with the EPA [and] that for TYs 2010 through 2019, a total of $893,935,025 (87 percent) worth of I.R.C. § 45Q credits were claimed by these 10 taxpayers when they were not in compliance with the EPA (i.e., they did not have an approved MRV Plan in place at the time the credit was claimed)."

Senator Menendez forwarded this report to IRS Commissioner Charles Rettig on April 29, noting that the report demonstrates "the apparent failure of the fossil fuel industry to act in good faith when claiming Section 45Q credits", asking for greater auditing and enforcement, and calling the findings an "apparent failure of the fossil fuel industry to act in good faith." He therefore asked the IRS to audit every taxpayer claiming more than $10,000 worth of 45Q credits by May 13 and to retroactively deny credits to taxpayers that did not comply with the EPA's requirements.