How does irs verify solar credit

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Last updated: April 8, 2026

Quick Answer: The IRS verifies solar tax credits primarily through documentation review during audits, requiring taxpayers to submit Form 5695 with their tax return and maintain proof of purchase and installation. They cross-check information with state databases, utility records, and manufacturer certifications to confirm eligibility for the 30% credit under the Inflation Reduction Act. Specific verification includes checking installation dates (post-2005 for initial credits), system costs, and compliance with IRS Notice 2013-70 guidelines. In 2022, the IRS processed over 2.1 million energy credit claims, with audits focusing on inflated costs or ineligible installations.

Key Facts

The solar Investment Tax Credit (ITC) was established at 30% by the Energy Policy Act of 2005, initially set to phase down but extended to 2034 under the Inflation Reduction Act of 2022.
Taxpayers must file IRS Form 5695 to claim the credit, with documentation including receipts, manufacturer certification statements, and proof of installation date.
The IRS verifies credits through audits that review system costs, with average residential solar installations costing $20,000-$40,000, yielding credits of $6,000-$12,000.
In 2023, the IRS issued guidance in Notice 2023-59 requiring systems to meet domestic content requirements for full credit eligibility starting in 2024.
Audit rates for energy credits are approximately 0.5% of claims, but the IRS increased scrutiny after identifying $2.3 billion in potentially erroneous claims from 2016-2020.

Overview

The solar Investment Tax Credit (ITC) is a federal incentive established under the Energy Policy Act of 2005 to promote renewable energy adoption. Initially set at 30% for residential and commercial solar installations, it was scheduled to phase down to 26% in 2020, 22% in 2021, and 10% for commercial projects thereafter. However, the Inflation Reduction Act of 2022 extended and modified the credit, restoring it to 30% through 2032, then gradually reducing to 26% in 2033 and 22% in 2034 before expiring for residential systems in 2035. The credit applies to solar photovoltaic systems, solar water heaters, and other solar technologies installed in primary residences or businesses. Since its inception, the ITC has driven significant solar growth, with U.S. solar capacity increasing from 1.2 gigawatts in 2008 to over 150 gigawatts by 2023, supported by more than $50 billion in cumulative tax credits. The credit is non-refundable but can be carried forward to future tax years if it exceeds tax liability.

How It Works

The IRS verification process for solar credits involves multiple steps to ensure compliance. Taxpayers claim the credit by completing Form 5695 (Residential Energy Credits) and attaching it to their federal income tax return (typically Form 1040). They must report the total qualified solar electric property costs, including equipment, labor, and permitting fees, but excluding financing costs or subsidies. The IRS requires maintained documentation such as receipts, manufacturer certification statements confirming efficiency standards, and proof of installation date (must be placed in service during the tax year). During audits, the IRS cross-references this information with state solar incentive databases, utility interconnection records, and sometimes third-party verification through the Database of State Incentives for Renewables & Efficiency (DSIRE). They also check for compliance with IRS guidance, such as Notice 2013-70, which outlines eligibility requirements, and newer rules like domestic content provisions under the Inflation Reduction Act. The IRS may request additional evidence, such as contractor invoices or system performance data, to verify costs and prevent fraud, such as inflated claims or claims for non-qualified properties.

Why It Matters

Proper IRS verification of solar credits is crucial for maintaining the integrity of renewable energy incentives and ensuring fair distribution of tax benefits. Accurate verification helps prevent fraud, which the Treasury Department estimated could cost up to $10 billion annually across energy credits if unaddressed. It also supports environmental goals by ensuring credits go to legitimate solar installations, contributing to reduced carbon emissions—solar energy avoids approximately 100 million metric tons of CO2 annually in the U.S. For taxpayers, correct verification avoids penalties, interest, and potential legal issues from erroneous claims, with the IRS assessing accuracy-related penalties of 20% on underpayments due to negligence. On a broader scale, effective verification sustains public trust in solar incentives, encouraging continued investment and driving down solar costs by over 70% since 2010, making renewable energy more accessible and supporting energy independence.