IRS cracks down on “non-valid” tribal tax credits

Bloomberg Tax reporter Erin Schilling broke the story that the IRS is instructing employees to disallow claims for so-called “sovereign tribal tax credits,” an arrangement now under federal investigation. Procedural updates added to the Internal Revenue Manual this summer direct examiners to reject these credits regardless of documentation. The IRS describes them as “highly questionable” and warns that they should not be allowed as “Other Credits” on any tax return.

Promoters, like White River Energy Corp., have marketed these disallowed credits as tax shelters for wealthy investors. The Treasury Department and the IRS state that these credits do not exist. Federal prosecutors are investigating, and investors who allege they lost millions have filed at least one civil lawsuit seeking damages from promoters.

Which tribal tax credits are invalid?

If you see returns with “tribal tax credit,” “sovereign tribal federal tax credit,” “Native American tribal tax credit,” or even references to §6418 connected to these arrangements, know they are not legitimate. Since June, the IRS has issued repeated internal alerts, and examiners are directed to disallow them on sight.

The real history of tribal tax credits

The confusion comes partly from the fact that legitimate tribal-related credits and incentives have existed in the past:

• Indian employment credit (§45A) provided a 20% credit on qualified wages and health insurance costs for employees who were enrolled tribal members performing services on an Indian reservation. The credit expired after Dec. 31, 2021.
• Accelerated depreciation (§168(j)) allowed shorter recovery periods for “qualified Indian reservation property.” It also expired after 2021.
• Clean energy credits, including the investment and production tax credits, remain available under current law. Tribal governments and entities can make a direct-pay election under §6417 to receive these credits as refundable payments. In some cases, they may also qualify for a bonus credit under the §48(e) Low-Income Communities Bonus Credit Program for projects located on Indian land. These are the only federal tax credits currently available to tribal governments.

Legitimate tribal credits are those enacted by Congress and administered through clear statutory authority. The so-called “sovereign tribal tax credits” promoted by White River and others have no such foundation.

How does the IRS crackdown on tribal tax credits impact tax preparers?

• Audit risk: Any return claiming these “credits” will likely be flagged and disallowed. That means possible penalties and interest for clients, plus potential preparer penalties if you sign such returns.
• Client education: Some high-net-worth individuals may be approached by promoters. You should be ready to explain why these credits aren’t legitimate and steer them away.
• Opportunity to advise: There are still real planning opportunities in the clean energy space, especially for tribal governments or projects located on Indian land. These require proper allocation and compliance, not shortcuts.

The bottom line on IRS disallowance of tribal tax credits

The IRS has made its stance clear: these so-called “tribal credits” don’t exist. Preparers should avoid them entirely, and taxpayers enticed by promoters should seek immediate professional advice before filing.

NATP will continue to monitor this investigation and provide updates on legitimate tax incentives affecting tribal communities and taxpayers.