The Building Tax Racket

​Government entities should ensure controls are sufficient to address unauthorized grants or tax deductions to contractors.

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The University of Houston and University of Texas systems have sued tax-credit consulting firm Alliantgroup, accusing it and architectural firm WHR of conspiring to obtain more than $1.6 million in unauthorized tax benefits from building construction projects at the two universities, the Houston Press reports. Alliantgroup and WHR applied for the credits under a provision of the U.S. federal tax code that allows building owners to obtain tax deductions for meeting energy-efficiency standards. Under Section 179D, government entities can allocate the tax deduction for their construction projects to private engineering and design firms that work on them. However, the universities allege that WHR misled unauthorized university representatives into signing the application forms.

Lessons Learned

Internal auditors likely will understand that a federal tax credit program aimed at increasing energy-efficient buildings is both laudable but also fraught with fraud risks. In this case, there seems to be a need to improve both the University of Texas' and University of Houston's controls as well as the U.S. Internal Revenue Service's (IRS') controls and monitoring of the Section 179D deduction.

Program monitoring, review, and audit officials need to ask specific questions and carefully examine documentation to uncover deceptive practices before the allocation. Individuals and organizations seeking to defraud governments to get access to grant or tax credit money frequently manipulate or falsify various details in the proposal or submission. Fraudsters can falsify any of the types of information required in support of an allocation of a Section 179D deduction from the owner of a government-owned building to the designer of a project:

  • The name, address, and telephone number of an authorized representative of the owner of the government-owned building.
  • The name, address, and telephone number of an authorized representative of the designer receiving the allocation of the Section 179D deduction.
  • The address of the government-owned building on or in which the property is installed.
  • The cost of the property.
  • The date the property is placed in service.
  • The amount of the Section 179D deduction allocated to the designer.


The previous three elements are especially susceptible to falsifications and exaggerations. Other elements include:

  • The signatures of the authorized representatives of both the owner of the government-owned building and the designer or the designer's authorized representative. Changing a person's title or job description to match the requirements that qualify him or her for signing off on the allocation is the problem here.
  • A declaration, applicable to the allocation and any accompanying documents, signed by the authorized representative of the owner of the government-owned building, in this form:

    "Under penalties of perjury, I declare that I have examined this allocation, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this allocation are true, correct, and complete." 

Whistleblower programs can only work if there is unfettered access to the evidence given. A further issue compounding the IRS' ability to detect this kind of fraud would seem to be a significant gap in its whistleblowing program. According to news reports, some Alliantgroup employees allege the company helped its clients evade taxes. IRS agents wanted to impanel a grand jury to investigate the case, but IRS senior management overruled them without talking to the whistleblowers, according to a Bloomberg report. The IRS generally doesn't permit its most knowledgeable examiners — field agents handling audits — to speak to the whistleblowers at all, because of strict laws protecting taxpayer privacy and fears of accidentally sharing confidential information with whistleblowers. Perhaps that partially explains why out of 1,300 whistleblower cases in the past six years, only three have resulted in financial awards. 


Art Stewart
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About the Author

 

 

Art StewartArt Stewart<p>​Art Stewart is an independent management consultant with more than 35 years of experience in internal audit, financial management, performance measurement, governance, and strategic policy planning.​​​</p>https://iaonline.theiia.org/authors/Pages/Art-Stewart.aspx

 

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