Watchdog: IRS wrongly gives billions in education credits

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The IRS is wasting billions of dollars a year by giving tax breaks for education to students who are ineligible or haven't filed the correct paperwork, a federal watchdog said Tuesday. 

Treasury's inspector general for tax administration said that the IRS might have wrongly handed more than $5.6 billion in education incentives in 2012, to some 3.6 million taxpayers.

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What's worse, the inspector general said, is that the watchdog had previously warned that billions of dollars on education credits were being mishandled, and the IRS still didn't have a good system in place.

"The IRS still does not have effective processes to identify erroneous claims for education credits,” Russell George, the tax administration inspector general, said in a statement.  

George added that the IRS had heeded some of his recommendations, but far from all. "As a result, taxpayers continue to receive billions of dollars in potentially erroneous education credits," he said.

In all, taxpayers claimed around $19 billion in education credits in 2012.

In a statement, the IRS said that it thought the inspector general was overstating the amount of money that was wrongly being given out for education credits, and said that it had already "taken a number of steps" to protect the incentives.

Still, the IRS acknowledged it had more work to do in shoring up the education credits. In its statement, the agency asked Congress to both streamline the preferences for education, and to give it more tools to check student eligibility for the incentives.

"IRS efforts in this area are hampered by the complexity of laws affecting education credits," the agency said, before noting that its budget had been cut by more than $1 billion in recent years.

"We simply do not have enough resources to audit every questionable credit," the IRS said.

The inspector general said that the IRS wrongly awarded education incentives in a variety of ways.

More than two million taxpayers got education credits without the required tax form, the watchdog said, while around 1.6 million received assistance for students attending schools not eligible for the incentives.

Hundreds of thousands also received credits for more than four years or while attending schools less than half time, both requirements of the American Opportunity Tax Credit.

Senate Finance Chairman Orrin HatchOrrin HatchMedicare trust fund running out of money fast Long past time to fix evidence-sharing across borders Overnight Tech: Facebook's Sandberg comes to Washington | Senate faces new surveillance fight | Warren enters privacy debate MORE (R-Utah) said the new report raised questions about the IRS's ability to administer the American Opportunity Tax Credit, which was created by the Democrats' 2009 stimulus package.

Hatch insisted "the IRS has only succeeded in stimulating waste by not effectively identifying erroneous claims."

"The IRS owes it to American families and hardworking taxpayers to properly safeguard their hard-earned dollars and not dole them out to people who are not qualified to receive such credits," he added.

Students do have a variety of options when it comes to tax breaks for education. Congress created two separate incentives for college and postsecondary education in 1997. 

Lawmakers then expanded one of those incentives into the American Opportunity Tax Credit in the stimulus.

That tax break has since been a favorite of Democrats, who got it extended through 2017 in the fiscal cliff deal and have been angling to make it permanent.

Lawmakers from both sides of the aisle have pushed legislation that would consolidate the major tax breaks for college education into one main incentive.