IRS may have issued nearly $6 billion in fake education credits in 2012

'We simply do not have enough resources to audit every questionable credit'

The Internal Revenue Service (IRS) issued $5.6 billion in possibly fraudulent education tax credits to 3.6 million taxpayers in 2012, accounting for more than 25% of all credited funds claimed that year, according to a new report by the agency's inspector general.

Although most of the education credits were given to students, the IRS never received a tuition statement from their schools. Some of the students did not take enough classes to be eligible while others attended institutions that were ineligible.

There are two main education tax credits:

  • The American Opportunity Tax Credit provides $2,500 per year toward tuition and other expenses. It can only go to students who are in a degree program, and only for four years.
  • The Lifetime Learning Credit is 20% of tuition and education expenses—up to $2,000. Students may claim this for an unlimited number of years, and they do not need to be in a degree program.

The agency "still does not have effective processes to identify erroneous claims" for these credits, says J. Russell George, the Treasury's inspector general for tax administration.

The IRS has improved efforts since 2010, when it issued $3.2 billion in potentially bogus education credits but still has not addressed all deficiencies George identified in a 2011 report.

IRS officials say Congress can help by:

  • Streamlining education tax credits;
  • Restoring budget cuts to the agency; and
  • Giving them more ways to confirm student eligibility.

"We simply do not have enough resources to audit every questionable credit," says a statement from the agency. The statement also notes the dollar estimates are likely overstated, but that the agency "believes more can be done in this area and will continue working with Congress and (the IG) to make improvements" (Chicago Tribune, 5/4).

The takeaway: A new report from the IRS inspector general says $5.6 billion in bogus education credits, and the agency says it needs more resources to improve its auditing process.

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