Taxpayers Get Billions in Erroneous Education Tax Credits

IRS erred in accepting ineligible claims; error expected to grow substantially

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The IRS has erroneously accepted claims from over two million taxpayers who were not entitled to draw education tax credits, according to a report from the Treasury Inspector General for Tax Administration, and the cost is in the billions of dollars. Not only that, but the error is expected to increase billions of dollars more.

The inspector general's report, issued Thursday, said that it assessed the ability of the IRS to identify erroneous claims for the refundable tax credit known as the American Opportunity Tax Credit , created by the American Recovery and Reinvestment Act of 2009 to help taxpayers offset the cost of higher education. What it found was that an estimated 2.1 million taxpayers may have gotten $3.2 billion in refunds based on claims to which they were not entitled, and the problem is expected to escalate.

Initially the IRS disputed inspector general's findings; subsequently it notified the inspector general that it had indeed found a high percentage of claims with no supporting documentation to be erroneous.

Among the findings were these:

  • 1.7 million taxpayers erroneously received an estimated $2.6 billion in education credits despite lacking supporting documentation that they had attended an eligible institution
  • 370,924 taxpayers received an estimated $550 million in education credits for which they were not eligible because they did not attend college for the required amount of time and/or were post-graduate students.
  • 84,754 students lacking a valid SSN were claimed by taxpayers who received $103 million in education credits; each of these students had an Individual Taxpayer Identification Number.
  • 63,713 taxpayers erroneously received an estimated $88.4 million in education credits for students claimed as dependents or spouses on another taxpayer’s tax return
  • 250 prisoners erroneously received $255,879 in education credits
  • 52% of returns with potentially erroneous education credits were prepared by paid tax preparers, who should have been aware of the eligibility requirements.

J. Russell George, Treasury inspector general for tax administration, said in a statement, “Based on the results of our review, the IRS does not have effective processes to identify taxpayers who claim erroneous education credits. If not addressed, this could result in up to $12.8 billion in potentially erroneous refunds over four years.”

Based on its findings, George issued 11 recommendations that included revising the current tax form to claim education credits; coordinating with the Department of Education to assess using its data files in tax return processing; revising compliance programs to identify taxpayers who erroneously claim the credit; and coordinating with the Department of the Treasury to determine whether legislation is needed to clarify whether the credit may be claimed for students who lack a valid Social Security number.

The IRS agreed with 10 and partially agreed with the final recommendation—to initiate a Tax Return Preparer Project to address those preparers associated with large volumes of erroneous education credit claims.

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