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Treasury Report Finds Estimated $3.2 Billion in Erroneous Education Tax Credits

October 24, 2011

A recent audit report published by the Treasury Inspector General for Tax Administration (TIGTA) identified 2.1 million taxpayers who may be receiving $ 3.2billion in erroneously-claimed education tax credits. 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. The Recovery Act requires federal agencies to ensure appropriate measures are taken to prevent fraud, waste, and abuse. TIGTA is tasked with monitoring the Internal Revenue Service’s implementation of Recovery Act provisions. The purpose of the audit was to evaluate the effectiveness of IRS processes to identify erroneous AOTC claims from January 1 through May 28, 2010.

Findings. As of May 28, 2010, TIGTA identified 2.1 million taxpayers receiving $3.2 billion in education credits that appear to be erroneous. At least 1.1 million (52 percent) had tax returns prepared by a paid tax return preparer. Other findings include:

  • 1.7 million taxpayers received $2.6 billion in education credits for students for whom there was no supporting documentation in IRS files that they attended an educational institution.
  • 370,924 individuals claimed as students were not eligible because they did not attend the required amount of time and/or were postgraduate students, resulting in an estimated $550 million in erroneous education credits.
  • 63,713 taxpayers erroneously received $88.4 million in education credits for students claimed as a dependent or spouse on another taxpayer's tax return.
  • 250 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.)

TIGTA made several recommendations to IRS, including: revising the Form 8863, the form used by taxpayers to claim education tax credits; revising compliance programs to identify taxpayers erroneously claiming the credit; and 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 the name, address, and employer identification number of institution(s) that the student attended on Form 8863. 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, IRS suggested that the numbers of erroneous claims may be exaggerated due to timing issues between 1098-Ts and the year in which taxpayers are eligible for the credit.

Implications for Colleges and Universities. 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 Boxes 8 and 9 related to enrollment of the student at the institution. These are check boxes used to indicate if the student attended at least half-time for one academic period during the year (Box 8) or if 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 number 7 in the report (appears on page 13) directs IRS to “develop a process to identify and notify educational institutions that are preparing inaccurate Forms 1098-T.” IRS agreed with the recommendation and noted that some institutions have used unallowable characters in the 1098-T checkboxes. The Service is moving forward with ways to identify and reject documents using incorrect coding on Forms 1099-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.

Contact

Mary Bachinger
Director, Tax Policy
202.861.2581
E-mail