US Education Tax Credits Overclaimed

by Mike Godfrey, Tax-News.com, Washington

21 October 2011

According to a new report from the United States Treasury Inspector General for Tax Administration (TIGTA), an estimated 2.1m taxpayers may have received USD3.2bn in erroneous education tax credits.

The American Recovery and Reinvestment Act created a refundable tax credit called the American Opportunity Tax Credit (AOTC) to help taxpayers offset the cost of higher education in 2009, and the credit has been extended to 2011 and 2012 returns. As a consequence, TIGTA has assessed the effectiveness of the Internal Revenue Service (IRS) processes to identify erroneous AOTC claims.

TIGTA found that 1.7m taxpayers erroneously received an estimated USD2.6bn in education credits even though the IRS had no supporting documentation that these taxpayers had attended an accredited institution of higher learning.

While the IRS initially did not agree with the amount of erroneous claims identified by TIGTA, it subsequently informed TIGTA that it has found a high percentage of the claims with no supporting documentation to indeed be erroneous. IRS management then noted that they expect the percentage found to be erroneous to further grow and have increased the number of tax returns they plan to review with this condition in 2012.

Other TIGTA findings include the receipt by almost 371,000 taxpayers of an estimated USD550m 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; and claims by 84,750 students who did not have a valid Social Security Number (SSN) for USD103m in education credits. Each of these students had an Individual Taxpayer Identification Number.

Furthermore, an estimated 52% of the returns with potentially erroneous education credits were prepared by paid tax preparers, who should have been aware of the eligibility requirements.

“Based on the results of our review, the IRS does not have effective processes to identify taxpayers who claim erroneous education credits,” said J. Russell George, the TIGTA. “If not addressed, this could result in up to USD12.8bn in potentially erroneous refunds over four years.”

TIGTA made 11 recommendations including: 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 programmes 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 SSN.

The IRS agreed with 10 of TIGTA’s recommendations, but disagreed with the 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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