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Firm Overview IRS Continues To Mismanage Refundable Tax Credits
November 2011
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The American Recovery and Reinvestment Act of 2009 (Section 1004 of the economic stimulus law) provides for a refundable tax credit known as the American Opportunity Tax Credit (AOTC). The AOTC allows taxpayers to receive a credit for higher education expenses up to $4,000. The first 40% of the qualified expenses is refundable, up to $1,000. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is quickly phased out for taxpayers with incomes above these levels, so that no credit is available for single taxpayers having $90,000 of income, and $180,000 for Married Jointly Filers. The credits are obtained using Form 8863.
In a report entitled, “Billions of Dollars in Education Credits Appear to Be Erroneous”, dated October 20, 2011, the Treasury Inspector General for Tax Administration (TIGTA) summarized its findings as follows:
“Based on the results of our review, the IRS does not have effective processes to identify taxpayers who claim erroneous education credits. These ineffective processes have resulted in 2.1 million taxpayers receiving a total of $3.2 billion in education credits ($1.6 billion in refundable credits and $1.6 billion in nonrefundable credits) that appear to be erroneous. Over 4 years, erroneous education credits could potentially reach $12.8 billion.”
The IRS could have prevented this waste. Students who are attending qualified schools receive a Form 1098-T, as does the IRS. The IRS had the means of matching Form 1098-T with taxpayer refund requests, but does not do so before sending billions of dollars of checks for illegitimate claims. The IRS claims that utilizing its matching program would delay refunds for legitimate claims. However, the audit report identifies two alternative means of performing a timely comparison using Department of Education databases, and the legal authority that already exists for doing so. The Department of Education reports that it would cooperate with the IRS should the IRS desire this.
Based on an interview of an IRS employee, the press widely reported that the IRS disputed the audit findings. The IRS spokesperson providing these initial comments was entirely inconsistent with the IRS actual written response that was reproduced in full as part of the TIGTA report. In reality, the IRS agreed with ten of TIGTA’s recommendations and partially agreed with an eleventh recommendation. The only recommendation with any disagreement had nothing to do with the alleged disagreement stated by the interviewed IRS spokesperson. The IRS Inspector General reported:
“IRS management has informed us that they have found a high percentage of the claims we identified to be erroneous. The IRS’s Examination function is currently performing a review of tax returns of individuals claiming students for whom the IRS has no supporting documentation. As of July 2011, its audit results show that 72 percent of the claims reviewed are erroneous.”
The IRS has had problems with managing other refundable credits. For example, on September 1, 2011, the Treasury Inspector General for Tax Administration released a report showing that the IRS paid $4.2 billion in refundable child tax credits that should not have been paid. In December 2009, the Inspector General issued two reports that both involved payments of billions of improper refundable tax credits and the related administration of these programs.
The refundable amount of the credit can result in taxpayers receiving a check from the federal government even if no income tax is withheld or paid. The IRS and the Treasury Inspector General have repeatedly acknowledged that refundable credits are high risk programs that are difficult to control. Refundable tax credits are an invitation for free and easy money from the federal government by anyone who can fill out a relatively simple form. Unless backed with effective administration, Congress should stop passing refundable tax credit programs that end up costing billions in fraud.
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