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Failing education credit claims

By Kay Bell ·
Tuesday, November 1, 2011
Posted: 12 pm ET

Uncle Sam is happy to help you pay for your continuing education. But just like your parents, he'd really appreciate it if you'd attend class.

Such truancy has produced a billion dollar tax problem for the federal government, according to the Treasury Inspector General for Tax Administration, or TIGTA, the office charged with keeping an eye on Internal Revenue Service operations.

TIGTA investigators found that around 2.1 million taxpayers may have received $3.2 billion in erroneous American Opportunity Tax Credit claims between Jan. 1, 2010, and May 28, 2010.

The American Opportunity Tax Credit was created in 2009 to help more students (or their parents) pay for the cost of college. It offers $2,500 toward college costs, more money than the Hope Credit, which it replaced, did.

Even better, $1,000 of the American Opportunity credit is refundable, meaning it can get you a refund if you don't owe any taxes when you file. The tax break is available through 2012.

But taxes are like so much of life. Good deeds don't go unpunished.

In breaking down the figures, TIGTA discovered that the IRS paid an estimated $2.6 billion to 1.7 million individuals who weren't even attending college.

Another $550 million went to students who didn't attend school at least half-time or who were, contrary to the tax credit's rules, in graduate school.

Students who were claimed as dependents on someone else's tax return got another erroneous $88 million.

And while the school of hard knocks doesn't qualify for the tax break, $256,000 in American Opportunity credit money was paid to 250 prisoners.

"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."

The IRS initially balked at the extent of erroneous claims identified by TIGTA, but the agency subsequently acknowledged that it has found a "high percentage of the claims with no supporting documentation to indeed be erroneous."

Really, people cheat on tax returns just like they cheat on school exams? I'm shocked, shocked!

It gets worse. As of July 2011, IRS audit results revealed that 72 percent of the education claims it reviewed were incorrect. The IRS has issued assessments against almost 1,500 of those returns, totaling more than $2.2 million.

IRS officials noted that they expect to find even more improper American Opportunity Tax Credit claims and, as a result, this year they plan to review more tax returns that claim education credits.

In addition, TIGTA has some homework suggestions for the IRS, 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; and revising compliance programs to identify taxpayers who erroneously claim the credit.

As for taxpayers, Bankrate's tax tip on education credits serves as a handy study guide to make sure you don't fail your credit claim.

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