Report: Millions are wrongly claiming education tax credit

The IRS might have distributed more than $3 billion in wrongly claimed education tax credits to millions of taxpayers, a federal audit released Thursday has found.

In all, the Treasury Department’s inspector general for tax administration said 2.1 million taxpayers could have claimed the American Opportunity Tax Credit, which was created by the 2009 stimulus package, in error — and that $3.2 billion, evenly divided between refundable and non-refundable credits, might have been disbursed.

The report additionally found that most of the erroneous claims came from tax returns filed by paid preparers, that the vast majority of those claims had no proof that the taxpayer was in school, and that 250 prisoners had even claimed the credit.

With the credit having been extended through the 2012 tax year, Russell George, the tax administration inspector general, also noted that the incorrect claims could continue to add up, to as much as $12.8 billion over four years.

“Based on the results of our review, the IRS does not have effective processes to identify taxpayers who claim erroneous education credits,” George said in a statement.

The IRS is pushing back hard on the report’s findings, saying in a Thursday statement they were “based on a flawed and superficial analysis” and that the inspector general “substantially” overstated the number of wrongly claimed credits.

“Despite our objections to the findings of the report, no amount of fraud is acceptable, and the IRS has already begun to take steps to increase monitoring and improve compliance,” the IRS statement added.

The report found that 1.7 million taxpayers who claimed the education tax credit, an amended version of the Hope Credit for education, did not have documentation proving they were in school, leading to an estimated $2.6 billion in incorrect claims.

Some 370,000 taxpayers — who were either not in school for enough time, were in graduate school, or both — were also wrongly given $550 million.

Taxpayers also received roughly $88 million in credits for students claimed on someone else’s tax return, and the 250 prisoners in all wrongly received more than a quarter-million dollars from the credit. 

The report also found close to 85,000 taxpayers using an Individual Taxpayer Identification Number, which can be used by resident and nonresident aliens who are not eligible for Social Security numbers. According to the report, the IRS says that a valid Social Security number is not needed to claim the credit. 

The IRS also said it had trouble with the inspector general's approach to its investigation, in particular the suggestion that the lack of an IRS form provided by schools meant that 1.7 million taxpayers had wrongly claimed the credit.

“It is inaccurate and unfair to say these claims ‘appear to be erroneous’ because of either a lack of proper information reporting by a college or because of data discrepancies between what the educational institution and the taxpayer reported,” the IRS statement said. “Previous studies have identified concerns over the accuracy of these information returns, and the IRS’s approach factors in these concerns.”

Still, the agency did say that it accepted and was working on several of the recommendations offered by the inspector general, including to require more information from taxpayers claiming the credit and examining whether more coordination can be done with the Education Department.

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