The IRS doled out more than $5 billion in potentially bogus college aid payments under an Obama stimulus tax credit in 2012, according to a new report Tuesday from the agency’s inspector general that said the administration still doesn’t have a good handle on how to root out erroneous claims.
More than 3.8 million students received more than $5.6 billion in questionable tax credits, the audit found – more than half of those never filed their tuition statement, while others were paid tax credits even though the schools they attended weren’t acceptable institutions.
Still other students claimed the credit for more than four years.
“The IRS still does not have effective processes to identify erroneous claims for education credits,” said J. Russell George, Treasury Inspector General for Tax Administration, who said he’s repeatedly warned the IRS about the problem but “many of the deficiencies TIGTA previously identified still exist.”
Many of the problems, however, lie with Congress, which needs to grant the IRS new powers to check students’ claims against other government databases, Mr. George said.
The tax break at issue is known as the American Opportunity Tax Credit, which was a creation of President Obama’s 2009 stimulus. It was slated to expire in 2010, but Mr. Obama and Congress have extended it through 2017.
The credits are designed to offset the costs of college.
IRS officials said part of the blame for the potential fraud lies with schools and the school year itself, saying that information on students’ attendance comes too late for the agency to be able to check it against returns.
But Debra Holland, IRS’s wage and investment division commissioner, insisted her agency does have “effective processes to identify erroneous claims,” saying they did catch 1.8 million questionable returns and put nearly 9,600 of those cases through a tax exam.
Ms. Holland blamed a lack of money for her agency’s inability to do more, and said they needed to limit their efforts to tax returns that had the highest risk of errors and the best chance of reclaiming money.
The IRS has already moved to add more checks to its system by looking to see who’s claimed the tax credit for more than four nonconsecutive years.
In a statement Tuesday, the IRS said Congress could help the agency out by granting it the power to automatically reject payments to students who claim more than four years of the tax credit. The agency also said Congress could approve new tools to access other government databases to check students’ eligibility for the tax credits, and could speed up the timeframe for filing the tuition forms that the inspector general said were missing in most of the cases it identified.
“Funding limitations have severely hampered our efforts in this and other compliance areas. Since 2010, the IRS budget has been reduced by nearly $1.2 billion and we expect to have 16,000 fewer employees by the end of this fiscal year. We simply do not have enough resources to audit every questionable credit,” the agency said.
The agency also said it believed the estimate of $5.6 billion was “overstated,” though the IRS acknowledged that it should try to do more to cut down on bad payments.