October 20, 2011 / 1:05 PM / 8 years ago

IRS and watchdog clash on tax credit errors

WASHINGTON (Reuters) - Millions of U.S. taxpayers may have erroneously received $3.2 billion in tax credits for college expenses, said an IRS watchdog on Thursday, drawing immediate fire from the U.S. tax collection agency.

A woman walks out of an Internal Revenue Service office in New York April 18, 2011. REUTERS/Lucas Jackson

The Internal Revenue Service mishandled claims for the education tax expense credit that was a key part of President Barack Obama’s 2009 economic stimulus bill, said the Treasury Inspector General for Tax Administration (TIGTA).

“The IRS does not have effective processes to identify taxpayers who claim erroneous education credits,” said Russell George, head of the government’s IRS watchdog unit.

“If not addressed, this could result in up to $12.8 billion in potentially erroneous refunds over four years,” he added.

The IRS said that it “strongly disputes the findings” of the TIGTA report, which it called “flawed and superficial.”

Still, the IRS acknowledged it can do more to determine a tax credit recipient’s eligibility.

The agency said it will revise reporting forms to ask for more information and that it is looking at ways to use Department of Education data to verify claims.

The IRS watchdog said most of the erroneous beneficiaries had no documents to prove they were in college; others may not have been in the classroom long enough to qualify or were graduate students; while still others lacked valid Social Security numbers.

“The IRS doesn’t know who a student is” and there is little third-party verification for a lot of college enrollment claims, said Elaine Maag, senior research associate at the Tax Policy Center, a think tank.


The 2009 Obama administration stimulus built on the existing education tax credit. The expanded credit was later extended to include 2011 and 2012 tax returns.

The law increased the education tax credit’s maximum amount to $2,500 from $1,800 a year. Up to 40 percent of the tax credit was refundable for low-income households with minimal tax exposure, meaning qualifying taxpayers could get up to $1,000 in cash.

The bulk of the TIGTA findings can be attributed to a mismatch between individual tax returns and forms submitted by colleges, the IRS said.

The incomplete data “does not in and of itself mean the taxpayer is ineligible for the credit,” IRS said.

It is “unfair” for TIGTA to say the tax credits were erroneously offered when the data do not correlate, IRS said.

The TIGTA findings may be attributable to a calendar variance, Maag said.

Conceivably, a student could pay tuition and claim the tax credit in December for an upcoming semester starting in January, while the college may not report that student as enrolled until the semester begins.

Therefore, the individual’s form and the college’s form fall in different tax years. “It’s very difficult to align data from the two sources,” Maag said.

Reporting by Kevin Drawbaugh and Patrick Temple-West; Editing by Andrew Hay

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