Students Who Did Not Attend an Educational Institution

October 21, 2011

A recent report by the Taxpayer Inspector General for Tax Administration (TIGTA) found that the 2.1 million tax filers claimed $3.2 billion in erroneous higher education tax credits for tax year 2009. Specifically, the tax credit studied was the American Opportunity Tax Credit a partially refundable tax credit worth up to $4,000. The credit was created by the American Recovery and Reinvestment Act as the more generous successor to the Hope Credit. The report notes that over the 4-year life of the credit the potential amount of erroneous payments could reach nearly $13 billion.

The TIGTA report found that tax filers who received the credit in error fell into four categories, as seen in this table taken from the report.

Potentially Erroneous Education Credits Received Through May 28, 2010

Erroneous Education Credit Ineligibility Classification

Number of Taxpayers Receiving Erroneous Credits

Claims Prepared by a Paid Tax Return Preparer

Amount of Erroneous Credits

Number

Percentage

Students Who Did Not Attend an Educational Institution

1,700,653

1,079,714

63%

$2.57 billion (Potential)

Students Who Attended Less Than Half-Time or Were Graduate Students

361,467

N/A

N/A

$550 million (Projected)

Students Allowed as Dependents on Another Taxpayer’s Tax Return

63,713

32,478

51%

$88.4 million (Actual)

Prisoners (Incarcerated All Year) Claiming Dependent Students

250

60

24%

$255,879 (Actual)

TOTAL

2,126,083

$3.2 billion

Source: TIGTA analysis of education credits through May 28, 2010.

By far the largest and most troubling category is the oxymoronic “Students Who Did Not Attend an Educational Institution.” The errors in the other categories could arguably be a result of a misunderstanding or misreading of the rules by taxpayers or tax preparers, or the result of record keeping mistakes. However, filing for a higher education tax credit when you did not have anyone in your family who actually attended college is a pretty flagrant mistake. So flagrant, in fact, that one would have a hard time believing that most of the errors in this category aren’t simply outright fraud. Even more disconcerting is that 63% of the tax returns in this category were prepared by paid, professional tax preparers.

The problem of erroneous and fraudulent tax credit payments is not unique to education tax credits (see reports on the EITC, the First Time Homebuyer Credit, and others) nor is it necessarily the fault of the IRS. In addition to collecting taxes, Congress has tasked the IRS with administering numerous tax provisions that look less like pure tax policies and more like programs administered by government agencies like Health and Human Services or the Department of Education. But being a tax collecting agency, the IRS is not set up to do this efficiently. And Congress expects the IRS to achieve all this while threatening the agency with budget cuts.

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