Report: IRS issued $5.6B in faulty education credits

The Internal Revenue Service potentially issued billions of dollars in faulty education tax credits in one year to taxpayers who didn't qualify, according to a report out Tuesday from a government watchdog group.

In an audit of the IRS, the Treasury Inspector General for Tax Administration estimated that the tax group issued more than $5.6 billion in faulty credits to about 3.6 million taxpayers filing 2012 tax returns. The IRS says it identified 1.8 million questionable education credit returns for the same year, or half of what TIGTA found.

"The IRS still does not have effective processes to identify erroneous claims for education credits," said J. Russell George, inspector general, in the report. "Although the IRS has taken steps to address some of our recommendations, many of the deficiencies TIGTA previously identified still exist."

The IRS issued credits to more than 2 million people without receiving a tuition statement from the school, the report says. Others who received credits attended ineligible schools, were claiming the credit more than four years or weren't enrolled in enough classes to qualify.

The report notes, though, that the form colleges are required to file with the IRS verifying tuition and a student's status at the school often isn't available by the time taxpayers file returns. Schools don't have to submit the form until March 31 each year. The IRS has also said in response to a previous TIGTA report that not receiving a tuition statement doesn't necessarily mean that a taxpayer isn't eligible for the education credit.

In response to the most recent report, the IRS says that it has taken measures to limit the number of faulty credits that get issued, but that complex tax laws and a lack of funding inhibit its ability to monitor education credits more closely. Between the 2011 and 2012 filing seasons, the IRS reduced the number of erroneous credits issued by $4.5 billion.

The IRS agreed to two of five recommendations from the inspector general, including legislative action that would move up the filing date for tuition statements and a better process for filtering out education credit claims from people who were incarcerated all year.