Report: IRS wrongly paid $5.6 billion in education tax breaks

Report: IRS wrongly paid $5.6 billion in education tax breaks 

Posted: 10:57 am Tuesday, May 5th, 2015

By Jamie Dupree

Investigators at the Treasury Department reported today that the Internal Revenue Service wrongly let taxpayers claim an estimated $5.6 billion dollars in federal education tax breaks in 2012, as a new report urged the tax agency to do more to clamp down on possible fraud involving tax breaks that were designed to help students pay for college, .

“The IRS still does not have effective processes to identify erroneous claims for education credits,” read a new report issued by the inspector general of the IRS.

At issue is the American Opportunity Tax Credit, which was created under President Obama’s stimulus law in 2009; it offers tax credits to help pay for college.

But too often, the report found that those tax breaks are going to people who may not deserve them – an estimated 3.6 million taxpayers based on tax returns filed in 2012.

Investigators say one sure sign of a problem was that more than 2 million taxpayers received over $3 billion in education tax breaks, even though no Form 1098-T was filed – that’s the form filed by schools to certify student enrollment.

One problem, according to investigators, is that the 1098-T form is “not available at the time tax returns are filed” – in other words, the IRS just takes taxpayers at their word when it comes to claiming the AOTC tax credit on a tax return.

“As such, the IRS is unable to use this information to identify potentially erroneous claims when tax returns are processed,” the report stated.

The review also found that some paid tax preparers seem to be taking advantage of the lack of review from the IRS on this matter.

“Paid tax return preparers continue to prepare a significant number of returns with questionable education credit claims,” the report found.

Other areas of lax IRS oversight were found as well – like the 1.6 million taxpayers that received around $2.5 billion in tax breaks for students who were “attending ineligible institutions.”

Unfortunately, this is not the first time the issue has been raised with the IRS by the inspector general.

In a September 2011 report, investigators found $3.2 billion in erroneous education tax credits were claimed – that figure has now grown to $5.6 billion.

That same report also warned that paid tax preparers were more likely to claim questionable education credits.

The Internal Revenue Service disagreed with a number of findings in the latest report, arguing that the tax agency has moved to weed out fraud related to education tax breaks.

“To the contrary,” the IRS wrote, “IRS identified 1.8 million questionable returns for potential audit through our exam filters.”

Several times, the IRS response noted “limited resources” in fighting such fraud.