Coverage of legislation and regulatory activity that affects higher education
By Mary M. Bachinger and Anne Gross
- Treasury Report Finds Estimated $3.2 Billion in Erroneous Education Tax Credits
- Student Loan Changes Under Consideration
A recent audit report published by the Treasury Inspector General for Tax Administration (TIGTA) identified 2.1 million taxpayers who may have received incorrectly claimed $3.2 billion in education tax credits from January 1 through May 28, 2010. The report was conducted pursuant to the American Recovery and Reinvestment Act of 2009 (Recovery Act), which amended the Hope Scholarship Credit to provide for a refundable tax credit called the American Opportunity Tax Credit (AOTC).
Background and Findings
The Recovery Act requires federal agencies to ensure that appropriate measures are taken to prevent fraud, waste, and abuse. TIGTA is tasked with monitoring Internal Revenue Service (IRS, the Service) implementation of Recovery Act provisions. The purpose of the related audit was to evaluate the effectiveness of IRS processes designed to identify erroneous AOTC claims, by reviewing tax returns for the first five months of 2010.
As of May 28, 2010, TIGTA identified 2.1 million taxpayers receiving $3.2 billion in education credits that appear to be erroneous. Tax returns for at least 1.1 million claimants (52 percent) were prepared by a paid tax professional.
Other findings include the following:
- 1.7 million taxpayers received $2.6 billion in education credits for students for whom IRS files included no supporting documentation confirming attendance at an educational institution.
- An additional 370,924 individuals claimed as students were not eligible for credits, because they did not attend the institution for the required amount of time and/or were postgraduate students whose education expenses do not qualify for credits. The result: an estimated $550 million in allegedly unsubstantiated education credits.
- Another 63,713 taxpayers mistakenly received $88.4 million in education credits for students claimed as a dependent or spouse on another taxpayer's tax return.
- Two hundred and fifty prisoners erroneously received $255,879 in education credits.
In addition, TIGTA noted that a valid Social Security number (SSN) is required for federal student aid eligibility but not for education tax credits. The review identified 84,754 students who did not have a valid SSN but were claimed by taxpayers who received $103 million in education credits. (Note: A valid individual taxpayer identification number (ITIN), rather than an SSN, is required for taxpayers claiming an education credit.)
Recommendations and Implications
The Recovery Act requires federal agencies to ensure that appropriate measures are taken to prevent fraud, waste, and abuse.
The Treasury Inspector General for Tax Administration made several recommendations to the IRS, including: (1) revising Form 8863, the form used by taxpayers to claim education tax credits; (2) revising compliance programs to identify taxpayers erroneously claiming the credit; and (3) coordinating with the Department of Education to explore the incorporation of ED data into tax return processing. One suggestion was that taxpayers be required to provide on Form 8863 the name, address, and employer identification number of institution(s) that the student attended. The IRS indicated in its response to the TIGTA report that the 2012 Form 8863 would be revised to capture this information.
In its response to the report, the Service suggested that the numbers of mistaken claims may be exaggerated due to timing issues between 1098-Ts and the year in which taxpayers are eligible for the credit.
While Form 1098-T accuracy was not confirmed to be a widespread problem generally, the report uncovered significant levels of inaccuracy related to information reported in the form's Boxes 8 and 9 related to the student's enrollment at the institution. These check boxes are used to indicate that the student attended at least half time for one academic period during the year (Box 8) or that the student was a graduate student (Box 9). When TIGTA investigators checked the accuracy of these elements on a sample of 1098-Ts, by contacting the issuing institution and using third-party data, 28 percent were confirmed to be accurate, 46 percent were inaccurate, and the remaining 26 percent could not be confirmed.
Recommendation No. 7, on page 13 of the report, directs the IRS to "develop a process to identify and notify educational institutions that are preparing inaccurate Forms 1098-T." The Service agreed with the recommendation and noted that some institutions have used unallowable characters in the 1098-T check boxes. The IRS is moving forward with ways to identify and reject documents using incorrect coding on Forms 1098-T for 2011.
As the 2011 1098-T reporting cycle begins, NACUBO recommends that institutions focus on efforts to ensure clarity and accuracy of enrollment information reported on the form. The IRS is undertaking compliance initiatives focused on taxpayers who claim the AOTC without matching 1098-Ts. As students and their parents receive inquiries from the IRS, institutions may find an increase in the number of requests for historic student account information and questions about 1098-T reporting.
RESOURCE LINKS The full text of the TIGTA report is available here. Note that the Sept. 16, 2011, report includes sections and, in some cases, pages of information that have been redacted from the report, indicated by asterisks and the repeated use of an alphanumeric code. Neither the report nor the summary offers any explanation for the redactions or the code. The NACUBO webcast "1098-T Reporting Refresher" is available on demand.
NACUBO CONTACT Mary M. Bachinger, director of tax policy, 202.861.2581