Although taxpayers having met the criteria of the relevant provisions, and thus claiming credits, are not anticipated to be ineligible or impermissible claimants, entities throughout the supply chain should be familiar with penalties concerning payments or transfers (§6417 and §48D) and general accuracy-related penalties (§6662).

Penalty for Supplier Certification Misstatements

The supplier that manufactures eligible components and provides certifications to downstream purchasers is subject to a specific penalty if that certification contains a substantial misstatement that results in a credit disallowance for the purchaser.

Trigger: The penalty under §6695B(a) is imposed if a person provides a certification described in clause (iii)(II)(bb) of §7701(a)(52)(D) with respect to any manufactured product, eligible component, or constituent element, material, or subcomponent of an eligible component, as provided under §6695B(a)(1) and §6695B(a)(1)(A).

Knowledge Requirement: The penalty applies if such person knows, or reasonably should have known, that the certification is inaccurate or false regarding: (A) whether the property was produced or manufactured by a PFE, or (B) the total direct costs or total direct material costs of such property that were not produced or manufactured by a PFE, as provided under §6695B(a)(2), §6695B(a)(2)(A), and §6695B(a)(2)(B).

Result Requirement: The inaccuracy or falsity must result in the disallowance of an applicable energy credit (as defined in §6662(m)(2)) and an understatement of income tax (within the meaning of §6662(d)(2)) in an amount that exceeds the lesser of 5 percent of the tax required to be shown on the return or $100,000, as provided under §6695B(a)(3), §6695B(a)(3)(A), and §6695B(a)(3)(B).

Penalty Amount: The amount of the penalty imposed under §6695B(a) shall be equal to the greater of 10 percent of the amount of the underpayment solely attributable to the inaccuracy or falsity, or $5,000, as provided under §6695B(b), §6695B(b)(1), and §6695B(b)(2).

Applicability Date: The penalty applies to certifications provided after December 31, 2025.

Exception: No penalty shall be imposed if the person establishes to the satisfaction of the Secretary that the inaccuracy or falsity is due to reasonable cause and not willful neglect, pursuant to §6695B(c).

Downstream Increased Tax Liability for Excessive Payments

If the downstream facility owner (the purchaser) elects to treat the Clean Electricity Investment Credit (§48E) or other credits as an Elective Payment Election (EPE) under §6417 or §48D, an inaccuracy in the credit amount claimed can result in a significant tax increase.

Excessive Payment Definition: An "excessive payment" is defined, with respect to a facility or property for which an election is made, as the amount equal to the excess of the amount treated as a payment over the amount of the credit which, without application of this subsection, would be otherwise allowable (determined without regard to §38(c)), pursuant to §6417(d)(6)(C) and §48D(d)(2)(F)(ii).

Increased Tax Imposed: If the Secretary determines that an amount treated as a payment under §6417(a) or §48D(d)(1) constitutes an excessive payment, the tax imposed on that entity by Chapter 1 (regardless of whether such entity would otherwise be subject to tax under such chapter) for the taxable year in which the determination is made shall be increased by an amount equal to the sum described below, pursuant to §6417(d)(6)(A) and §48D(d)(2)(F)(i).

The "Total Increase Amount" is calculated by summing the components determined for each instance of an excessive payment, regardless of whether the initial election was made under §6417 or §48D.

The increase in tax for a specific determination is equal to the sum of:

1. The amount of the excessive payment:

    ◦ Pursuant to §6417(d)(6)(A)(i) for applicable credits.

    ◦ Pursuant to §48D(d)(2)(F)(i)(I) for Advanced Manufacturing Investment Credit.

2. PLUS an additional amount equal to 20 percent of such excessive payment:

    ◦ Pursuant to §6417(d)(6)(A)(ii).

    ◦ Pursuant to §48D(d)(2)(F)(i)(II).

The key determination is that the final increase is imposed upon the single liability:

• In the case of an excessive payment under § 6417, the tax imposed on such entity (regardless of whether such entity would otherwise be subject to tax under such chapter) for the taxable year in which such determination is made shall be increased by the calculated sum, pursuant to §6417(d)(6)(A).
  
  

• In the case of an excessive payment under §48D, the tax imposed on such taxpayer for the taxable year in which such determination is made shall be increased by the calculated sum, pursuant to §48D(d)(2)(F)(i).

If the Secretary determines excessive payments related to both a §6417 credit (e.g., §48E Clean Electricity Investment Credit) and a §48D credit (Advanced Manufacturing Investment Credit), the penalty amount from each determination is computed separately using the two-component structure (100 percent plus 20 percent of the excessive amount). The combined total of these increases is applied as a single increase to the taxpayer's liability for that year.

Reasonable Cause Exception: The §6417(d)(6)(A)(ii) portion (the 20 percent penalty) shall not apply if the entity demonstrates to the satisfaction of the Secretary that the excessive payment resulted from reasonable cause, pursuant to §6417(d)(6)(B).

General Accuracy and Recapture Risks

The Code imposes a general accuracy-related penalty of 20 percent on the portion of any underpayment of tax to which this section applies (§6662(a)). This applies to portions attributable to: negligence or disregard of rules or regulations, or any substantial understatement of income tax, among others (§6662(b)(1) and (2)).

Negligence/Disregard: For purposes of this section, the term "negligence" includes any failure to make a reasonable attempt to comply with the provisions of this title, and the term "disregard" includes any careless, reckless, or intentional disregard (§6662(c)).

Special Substantial Understatement Rule: In the case of a taxpayer for which there is a disallowance of an applicable energy credit for any taxable year, the rules for determining whether there is a substantial understatement of income tax are modified (§6662(m)).

Applicable Energy Credit Disallowance: The term "disallowance of an applicable energy credit" means the disallowance of a credit under §45X, §45Y, or §48E by reason of overstating the material assistance cost ratio (as determined under §7701(a)(52)) with respect to any qualified facility, energy storage technology, or facility which produces eligible components (§6662(m)(2)).

Reasonable Cause Defense: The general reasonable cause and good faith exception applies to most accuracy-related penalties under §6662. To establish reasonable cause, the taxpayer’s position must be supported by a reasonable basis, which is a relatively high standard of tax reporting and is significantly higher than merely "not frivolous." The reasonable cause exception applies pursuant to §6664(c).