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TIGTA: 2.1 Million Taxpayers May Have Received $3.2 Billion In Erroneous Education Tax Credits

October 20, 2011

TIGTA - 2011-69 Karen Kraushaar karen.kraushaar@tigta.treas.gov TIGTACommunications@tigta.treas.gov (202) 622-6500

TIGTA: 2.1 Million Taxpayers May Have Received $3.2 Billion

In Erroneous Education Tax Credits

Washington - An estimated 2.1 million taxpayers may have received $3.2 billion in erroneous

education credits, according to a new report from the Treasury Inspector General for Tax

Administration (TIGTA).

The American Recovery and Reinvestment Act of 2009 created a refundable tax credit called the

American Opportunity Tax Credit (AOTC) to help taxpayers offset the cost of higher education.

This credit has been extended to 2011 and 2012 returns. TIGTA assessed the effectiveness of

the IRS processes to identify erroneous AOTC claims.

TIGTA found that 1.7 million taxpayers erroneously received an estimated $2.6 billion in

education credits even though the Internal Revenue Service (IRS) had no supporting

documentation that these taxpayers had attended an eligible institution, defined as an accredited

institution of higher learning. While the IRS initially did not agree with the amount of erroneous

claims identified by TIGTA, it subsequently informed TIGTA that it has found a high percentage

of the claims with no supporting documentation to indeed be erroneous. IRS management noted

that they expect the percentage found to be erroneous to further grow and have increased the

number of tax returns they plan to review with this condition in Fiscal Year 2012.

Other findings include:

• 370,924 taxpayers received an estimated $550 million in education credits for which theywere not eligible because they did not attend college for the required amount of timeand/or were post-graduate students.
• 84,754 students who did not have a valid Social Security Number (SSN) were claimed bytaxpayers who received $103 million in education credits. Each of these students had anIndividual Taxpayer Identification Number (ITIN).
• 63,713 taxpayers erroneously received an estimated $88.4 million in education credits forstudents claimed as dependents or spouses on another taxpayer’s tax return; and, 250prisoners erroneously received $255,879 in education credits.Additionally, an estimated 52 percent of the returns with potentially erroneous education creditswere prepared by paid tax preparers, who should have been aware of the eligibility requirements.

“Based on the results of our review, the IRS does not have effective processes to identify

taxpayers who claim erroneous education credits,” said J. Russell George, Treasury Inspector

General for Tax Administration. “If not addressed, this could result in up to $12.8 billion in

potentially erroneous refunds over four years,” Mr. George added.

TIGTA made 11 recommendations including: revising the current tax form to claim education

credits; coordinating with the Department of Education to assess using its data files in tax return

processing; revising compliance programs to identify taxpayers who erroneously claim the

credit; and coordinating with the Department of the Treasury to determine whether legislation is

needed to clarify whether the credit may be claimed for students who lack a valid SSN.

The IRS agreed with 10 of TIGTA’s recommendations and partially agreed with the remaining

recommendation. The IRS disagreed with TIGTA’s recommendation to initiate a Tax Return

Preparer Project to address those preparers associated with large volumes of erroneous education

credit claims.