The federal government wrongly paid as much as $3.2 billion in college-tuition tax credits in the first five months of 2010, including payments to more than 1.7 million people who apparently weren’t qualifying undergraduates, according to a new oversight report.
The Treasury Inspector General for Tax Administration said that over the life of the tax credit, the government could wrongly pay out a total of $12.8 billion for the American Opportunity Tax Credit (AOTC), which was part of the 2009 stimulus law and has since been extended.
“The IRS is failing to protect taxpayer dollars and must take stronger steps to ensure education credits should go to those who deserve them,” said Rep. Charles W. Boustany Jr., Louisiana Republican and chairman of the Ways and Means Committee’s oversight panel. “Enough is enough. It’s time for the IRS to start taking proactive measures to stop erroneous payments on the front end.”
In light of the findings, the IRS has promised to review more tax returns this year to see how widespread the cheating is.
“We are expanding our outreach efforts around the AOTC to educate all parties associated with the credit,” Richard Byrd Jr., commissioner of the IRS’ wage and investment division, said in a reply letter to investigators.
Congress created the college tax credit in the stimulus and later expanded it through 2012, and intended it to cover costs such as tuition. The maximum credit is $2,500, of which $1,000 can be refunded, which means the government treats it essentially as a benefit payment made through the tax code.
The 2009 cost was about $12 billion.
The inspector general calculated that 2.1 million taxpayers may have wrongly claimed the credit during the period it studied. Of those, 1.7 million were not qualifying undergraduates, 361,467 were either graduate students or undergraduates attending less than half-time, 63,713 were dependents on someone else’s tax return, and 250 were prisoners who claimed the credit despite being incarcerated the whole year.
The inspector general said the IRS at first questioned the high error rate investigators claimed, but as agency employees reviewed more cases, they began to realize how widespread the erroneous claims were.
“The IRS’ examination function is currently performing a review of tax returns of individuals claiming students for whom the IRS has no supporting documentation,” the investigators said in their report. “As of July 2011, its audit results show that 72 percent of the claims reviewed are erroneous, and it has proposed assessments totaling over $2.2 million for 1,477 tax returns it has audited so far.”
Investigators identified 84,754 individuals who claimed the credit even though they didn’t have Social Security numbers, but rather filed their taxes with an Individual Taxpayer Identification Number used by foreigners, including illegal immigrants, so they pay federal taxes on their earnings.
The inspector general and the IRS disagree over whether the law prohibits illegal immigrants from claiming refundable tax credits. The IRS says there is no specific ban in the education-credit law, but the inspector general points to broader law that prohibits illegal immigrants from receiving “a federal public benefit,” and said that includes tax credits.
Investigators also said in their report that students need valid Social Security numbers to claim federal education grants and loans.