Approximately 203,000 taxpayers erroneously claimed a total of over $300 million in Hope Credits for higher education in 2006, and over 169,000 claimed over $232 million in credits, according to a new report by the Treasury Inspector General for Tax Administration.

Some of the taxpayers who erroneously claimed the Hope Credit were IRS employees, and some taxpayers received the Hope Credit for the same student for more than two years.

The report found that taxpayers were able to erroneously claim the credits because the IRS system of controls does not provide for immediate disallowance of claims for the same student for more than two years. In addition, the IRS scrutinizes such claims only after refunds are issued, and the applied criteria identify only a small fraction of erroneous cases.

The IRS’s software is programmed to flag for examination taxpayers who claimed the Hope Credit for a third consecutive year but only if they also claimed a certain additional credit, and only if the additional credit exceeded a certain dollar amount. Such claims were referred to TIGTA's Office of Investigations for further action.

Currently, the IRS has legal authority to correct certain errors during processing, including calculation errors and entries that are inconsistent or exceed statutory limits, without having to issue the taxpayer a statutory notice of deficiency. However, claims for the Hope Credit beyond the two years allowed by law do not fall under this limited math error authority.

"I am concerned about the IRS's inability to administer the credit effectively," said TIGTA Inspector General J. Russell George in a statement. "The Hope Credit is intended to help taxpayers pay for the ever-increasing cost of higher education. It is imperative that the IRS works with the Treasury Department and Congress to obtain the tools it needs to effectively administer this important credit."

TIGTA also performed a computer analysis of all Forms 1098-T, a tuition statement provided by educational institutions to students, from 2005 through 2007. The form includes a box in which the educational institution may show the amount of tuition paid by the student, which is the figure that taxpayers and the IRS use in order to determine the amount of the credit. However, educational institutions are given the option of showing the amount billed for qualified tuition and related expenses, rather than the amount paid.

TIGTA found that the box in which the amount of tuition paid may be shown was blank on 80 percent of the Forms 1098-T it reviewed. Educational institutions expend approximately 5.1 million hours each year to complete Forms 1098-T and an estimated $3.8 million to mail the forms to students. While a few government agencies use some of the information on the form, the IRS does not use the form to match or confirm the amount of the claim.

TIGTA recommended that Congress provide the IRS with “math error authority” to disallow ineligible claims for the Hope Credit. The report also recommended that Congress enact legislation to either revise the reporting requirements for Form 1098-T so that the IRS and taxpayers are able to use it to calculate the amount of the claim, or else relieve educational institutions of the burden of producing the form.

IRS management agreed with all of TIGTA's recommendations. “We agree with your findings and believe improvements are needed to ensure eligible students receive the benefits they deserve and taxpayers claiming inappropriate benefits are denied those benefits,” wrote IRS Wage and Investment Division Commissioner Richard Byrd Jr.

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