Avoid Truancy to Claim Education Tax Credits

image source The U.S. government is happy to help students pay for their continuing education

Avoid Truancy to Claim Education Tax Credits

image source

The U.S. government is happy to help students pay for their continuing education so long as they attend class. Truancy has resulted in a billion-dollar tax headache for the U.S. Federal Government, according to the Treasury Inspector General for Tax Administration, the office that is mandated with keeping an eye on the operations of the Internal Revenue Service (IRS). The Administration’s investigators found that approximately 2.1 million taxpayers may have received $3.2 billion in American Opportunity Tax Credit claims erroneously between January 1, 2010, and May 28, 2010.

The American Opportunity Tax Credit was created in 2009 to assist students in meeting the cost of college. It gives out $2,500 toward college costs, much more than the $1,800 Hope Credit, which it replaced. Even better, $1,000 of the student tax relief is refundable, meaning that one is eligible for a refund if they don’t owe any taxes when they file. This tax break is available through 2012.

In their analysis of these figures, the TIGTA found that the IRS paid about $2.6 billion to 1.7 million persons who weren’t even attending college. Another $550 million went to students who didn’t attend school at least half-time or who were graduate students, contrary to the tax credit’s rules.

Students who were registered as dependents on other people’s tax returns got another erroneous $88 million in credit. Additionally, $256,000 in American Opportunity credit money was paid to 250 prisoners.

The main tax benefit of claiming an education credit is that the money comes directly off any monies one owes the government in taxes. This enables students to use the money that they have saved to pay for their college tuition and other qualified education expenses.

Alarmed by the stark results of the review, the Treasury Inspector General for Tax Administration, J. Russell George, admitted that the IRS lacked an effective process to identify taxpayers who claimed erroneous education credits. He further stated that if the problem was not addressed, it could lead to $12.8 billion in erroneous refunds over a period of four years.

At the beginning, the IRS was unwilling to accept the level of erroneous claims exposed by the TIGTA, but it later admitted that it had discovered a “high percentage of the claims with no supporting documentation to indeed be erroneous.”

As of July 2011, IRS audit results indicated that 72% of the education claims it reviewed were not correct. The IRS has issued assessments against about 1,500 of those returns, adding up to over $2.2 million. Its officials noted that they expect to find even more improper American Opportunity Tax Credit claims and, as a result, they plan on reviewing more returns claiming education credits.

Additionally, the TIGTA offered a number of suggestions for the IRS, including revising the current tax form to claim education credits, liaising with the Department of Education to assess files in tax return processing using its data, and revising compliance programs to nab taxpayers who erroneously claim the credit.