Although the IRS has developed processes to identify erroneous education credit claims, those processes only identified 50 percent of the more than 3.6 million questionable education credit claims identified during a recent review, the Treasury Inspector General for Tax Administration (TIGTA) has found in a new audit report. Specifically, TIGTA estimated that taxpayers received billions of dollars of education credits, even when they did not supply a Form 1098-T, Tuition Statement, and/or the student for which the claim was made was not attending an eligible institution. Furthermore, TIGTA found that the IRS approved millions of dollars of claimed American Opportunity Tax Credits (AOTCs) on behalf of students who had already claimed the credit for the maximum number of years or who were otherwise unqualified to receive the credit.
Under current law, there are two educational tax credits available to taxpayers: the Lifetime Learning Credit and the AOTC, which replaces the Hope Credit through 2017. The benefits and requirements for each credit are different. Among the numerous differences is that the AOTC Is available only for the first four tax years of postsecondary education; the Lifetime Learning Credit may be claimed for an unlimited number of years. Similarly, a taxpayer may only claim the AOTC if the student is enrolled in a program leading to a degree at least half-time for at least one academic period during the year. The Lifetime Learning Credit does not require that the program lead to a degree, and the student need only be enrolled in one or more courses.
TIGTA found that as of the end of 2013, more than 49 percent of the 3.6 million taxpayers with questionable education credit claims identified were prepared by a tax return preparer. This occurred despite the IRS’s plans to increase the coordination among its operating divisions and staffing in the Office of Professional Responsibility. The IRS also started identifying questionable AOTC claims prepared by tax return preparers for its Automated Questionable Credit Program and freezing the portion of the refund related to the questionable AOTC claim.
TIGTA made five recommendations, but the IRS disagreed with all but two. Following release of the report, the IRS stated that it had taken a number of steps to ensure education credit compliance and had reduced the number of claims by $4.5 billion in one year. Instead, the IRS efforts in this area are hampered by the complexity of laws affecting education credits and by funding limitations. The IRS also alleged that the dollar amounts in the TIGTA report had been overstated.