Fuel Tax Credit Audits: Eligibility, Fraud & IRS Crackdown

Heath Vo, JD, CPA Founder, ExFed Tax

Every few years, a perfectly legitimate tax credit gets dragged into the mud by aggressive marketing, sloppy preparation, and outright fraud.Right now, that credit is the Fuel Tax Credit.

If you’ve heard radio ads, seen TikToks, or had a preparer promise you “free money from the IRS” for fuel you already paid for, pause. Congress did not design this credit as a stimulus check for the general public—and the IRS is now treating abusive claims accordingly.

Let’s break down what the Fuel Tax Credit actually is, who it’s for, how it works mechanically, and what happens when things go sideways.

What Congress Intended the Fuel Tax Credit to Do

The Fuel Tax Credit exists because Congress did not want certain taxpayers paying federal excise tax on fuel when that fuel is not used on public highways.

That’s it. No mystery. No loophole.

Fuel excise taxes are baked into the price of gasoline and diesel at the pump. When fuel is used off-highway, Congress decided those taxes shouldn’t apply.

Examples of intended uses include:

• Farming equipment

• Construction equipment

• Forklifts and warehouse machinery

• Certain boats and commercial fishing operations

• Stationary generators

• Some aviation and commercial uses

Congress never intended:

• Everyday commuters

• Gig workers driving personal vehicles

• People who “bought gas last year”

• Anyone without a qualifying business use

This is not a “you paid gas tax, now get it back” program.

Who Is Actually Eligible?

Eligibility hinges on how the fuel was used, not how much fuel you bought.

Generally, you must:

• Use fuel for a qualifying off-highway business purpose

• Be able to substantiate gallons used for that purpose

• Maintain contemporaneous records (logs, invoices, equipment usage)

Most personal vehicles do not qualify—because they are used on public roads.Most ride-share, delivery, and commuting mileage does not qualify.

If your preparer didn’t ask:

• What equipment used the fuel

• Where it was operated

• How usage was tracked

…that’s like saying 'bomb' on an airplane.

How the Fuel Tax Credit Works (Mechanically)

The credit is typically claimed on Form 4136 and flows through to your individual or business return.

Mechanics in plain English:

1. Fuel is purchased at the pump (tax included).

2. A portion of that fuel is used in a non-taxable manner.

3. The taxpayer calculates eligible gallons × applicable credit rate.

4. The credit offsets tax owed or increases a refund.

Key point:This is a calculation-heavy, documentation-driven credit, not a checkbox.

Large or disproportionate claims relative to income will be noticed.

The Fraudulent Preparer Schemes

Here’s where things went off the rails.

Certain preparers:

• Claimed fuel credits for personal vehicles

• Fabricated or estimated gallons with no records

• Used “industry averages” with no legal basis

• Filed credits for taxpayers with no qualifying business

• Charged contingency-style fees based on refund size

These schemes spread fast because they:

• Promised big refunds

• Required little documentation

• Downplayed audit risk

• Shifted blame to “the IRS won’t check”

. . .Spoiler alert: they checked.

If you believe a tax preparer acted improperly—by fabricating credits, inflating numbers, or pushing you into something that didn’t pass the common-sense test—you can (and should) report them to the Internal Revenue Service. The IRS accepts preparer complaints using Form 14157 (Complaint: Tax Return Preparer), and if the issue involves a suspicious or fraudulent return, Form 14157-A may also be required. These forms allow you to document exactly what the preparer did, how they were compensated, and what positions were taken on your return. Reporting a preparer does not automatically mean you’re accusing yourself—it signals that you relied on bad advice and helps the IRS focus enforcement where it belongs. Bonus: the IRS takes preparer misconduct very seriously, and these complaints often lead to investigations, injunctions, and permanent bans. In other words, if someone sold you a fairy tale refund, this is how you return the favor—properly, quietly, and with paperwork.

The IRS Response: Why You’re Seeing So Many Fuel Tax Credit Audits

The Internal Revenue Service does not move quickly—but when it moves, it moves decisively, and here with Fuel Tax Credit Audits.

In response to widespread abuse, the IRS:

• Flagged Fuel Tax Credit claims as a high-risk issue

• Rolled out automated disallowance programs

• Issued mass audit letters denying credits by default

• Retrained Tax Examiners—previously underutilized in clerical roles—to handle these cases at scale

Translation: If you claimed this credit, the IRS now assumes it’s wrong until you prove otherwise.

Many letters include:

• Propose automatic disallowance and a tight letter that says "if you don't agree - show me your receipts"

• Proposed tax, penalties, and interest

• Tight response deadlines

What Happens If You Don’t Respond to the Report?

They will love you! If you receive a Revenue Agent’s Report (RAR) or examination notice and do nothing, the IRS will:

• Finalize the disallowance

• Assess the tax

• Add penalties (often 20% accuracy-related penalties)

• Begin collection activity

At that point, you’re no longer “explaining a credit”—you’re defending an assessment.

Silence is treated as agreement.

What If You Were Duped by a Preparer?

This happens more than people admit.

If you:

• Relied on a preparer’s advice

• Did not understand the credit

• Provided honest information

• Did not fabricate records

You may still have options:

• Penalty relief arguments

• Reasonable cause defenses

• Amended returns to limit exposure

• Preparers held accountable separately

But timing matters. Waiting makes everything harder and more expensive.

What If You Participated (or Think You Did... No Judgment)?

If you knowingly:

• Inflated usage

• Claimed personal fuel

• Signed returns you knew were wrong

The priority shifts from “refund defense” to damage control.

That may include:

• Strategic amendments

• Controlled disclosures

• Stopping penalties from snowballing

• Avoiding referrals beyond civil examination

The worst move is pretending it will “go away.”

. . . It won’t.

The Bottom Line

The Fuel Tax Credit is real.It is legitimate.And it is not for everyone.

Congress intended it for narrow, specific uses. Preparers turned it into a refund factory. The IRS responded exactly how you’d expect—slowly, then all at once.

If you claimed the credit and received a letter, or if you’re unsure whether your claim was valid, get advice from someone who understands how these cases are actually handled inside the system—not someone selling hope and hashtags. Get advice from ExFed Tax.

Because when the IRS asks for proof, vibes don’t count.

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