IRS wasted $5.6B on bogus Obama stimulus tax credits, audit finds

0

irs magnifying glass

By Stephen Dinan –
The IRS doled out more than $5 billion in potentially bogus college aid payments in 2012 under an Obama stimulus tax credit, according to a 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.

Nearly 4 million students had questionable claims, totaling more than $5.6 billion in that one year alone, the Treasury Inspector General for Tax Administration said. At least half of the students never provided tuition statements showing what they paid, while others attended schools that didn’t qualify them for the tax credit.

Other students claimed the credit for more than four years, which should have automatically earned a rejection, the investigators said.

“The IRS still does not have effective processes to identify erroneous claims for education credits,” said Treasury Inspector General for Tax Administration J. Russell George, who said he has warned the IRS repeatedly about the problem, but “many of the deficiencies TIGTA previously identified still exist.”

IRS officials insisted they have taken some steps and said the inspector general was overestimating the total lost to bogus payments — but the officials did acknowledge more needs to be done.

It’s not just the administration that takes blame. The inspector general and the IRS said Congress could easily tweak a few laws that would give the tax agency power to automatically correct tax returns that are clearly in error, such as those asking for a fifth or sixth year of the tax credit.

The tax break at issue began in 2007, but was converted into part of President Obama’s 2009 stimulus package and renamed the American Opportunity Tax Credit. It was supposed to expire in 2010, but Mr. Obama and Congress extended it through 2017.

The credits are designed to offset the costs of college, and are at least partially refundable, meaning even Americans who don’t owe taxes can file and get money back from the government.

“Unfortunately, as today’s report shows, the IRS has only succeeded in stimulating waste,” said Sen. Orrin G. Hatch, chairman of the Senate Finance Committee.

Of the 3.8 million students for whom the credit was claimed, about 2.1 million never filed the tuition statement form required to prove they qualified, and 1.6 million claimed to be attending schools that shouldn’t have qualified for the credit. More than 750,000 of the students broke both rules.

More than 400,000 tax returns claimed the credit despite the student attending school less than half-time, and hundreds of thousands of others had claimed more than four years of the credit — both conditions that should have disqualified them.

Investigators presented their findings to the IRS, which went back and conducted examinations of fewer than 2,000 students. Those that they have finished auditing, though, have generally been found to have been making bogus claims.

IRS officials said part of the blame for the potential fraud lies with the schedule. Schools aren’t required to report on students’ attendance until March 31, which comes well into the tax season, when many students have already filed their returns and claimed refunds.

Debra Holland, the IRS wage and investment division commissioner, said they have improved their checks already, spotting 1.8 million questionable returns. Of those, however, just 9,600 were put through an exam to see whether they were bilking the government.

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 time frame 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.