Erroneous education credits cost taxpayers a bundle

The IRS is tracking down filers who erroneously claim education credits. (Photo Credit: CC BY-SA/Calita Kabir/Flickr)

When it comes to claiming education tax credits, the IRS would like people to be on the honor system. While continuing education can mean extra cash in a student’s paycheck, false claims of continuing education are costing taxpayers a bundle, according to Bankrate.

The IRS spots erroneous education credit filings

The IRS checks figures closely, so students who pretend they went to college and attempt to erroneously take the education credit are discovered. According to the Treasury Inspector General for Tax Administration J. Russell George, nearly 2.1 million U.S. taxpayers may have received $3.2 billion in unwarranted education credits between Jan. 1, 2010, and May 28, 2010.

The abused education credit program at work is the American Opportunity Tax Credit. This credit, which became available in 2009 and is currently scheduled to be available through 2012, offers $2,500 to help offset college costs. It replaced the previous Hope Credit, which offered less money.

One of the high points of the American Opportunity Tax Credit is that $1,000 of the money granted is refundable. In other words, you can still claim the education credit and get the money, even if you don’t owe taxes.

Breaking down the naughty numbers

Of the nearly 2.1 million taxpayers who didn’t deserve the American Opportunity Tax Credit, approximately 1.7 million of those didn’t attend college at all, says George. The remainder didn’t attend college at least half time or were in graduate school, which doesn’t qualify for the education credit. The largest group was paid an estimated $2.6 billion, while the less than half time students got about $550 million.

Students listed as dependents on other filers’ tax forms got another $88 million, which is not allowed. There were 250 people who were in prison. They cost taxpayers $256,000.

As of July 2011, the IRS estimates that 72 percent of education credit claims are incorrect. Assessments have been issued against nearly 1,500 erroneous returns, total amount exceeding $2.2 million.

The future for erroneous education credits

George sees a very expensive future in store for erroneous education tax credits.

“Based on the results of our review, the IRS does not have effective processes to identify taxpayers who claim erroneous education credits,” he told Bankrate. “If not addressed, this could result in up to $12.8 billion in potentially erroneous refunds over four years.”

IRS on education credits



Internal Revenue Service

U.S. Treasury

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