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 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.”
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 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 billings in fraud.
Additional information can be found in this larger article.