Millions of Dollars in Erroneous Education
Credits Continue to Be Allowed
September 2001
Reference Number:
2001-40-183
This report has cleared
the Treasury Inspector General for Tax Administration disclosure review process
and information determined to be restricted from public release has been
redacted from this document.
September 20, 2001
MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Pamela
J. Gardiner /s/ Pamela J. Gardiner
Deputy
Inspector General for Audit
SUBJECT: Final
Audit Report - Millions of Dollars In Erroneous Education Credits Continue to
Be Allowed
This report presents the results of our review to determine if the
Internal Revenue Service (IRS) ensures that Education Credits are processed
correctly. In summary, we found that the
IRS was at risk of lost revenue of approximately $20.56 million because it did
not have automated controls in place to identify and resolve erroneous
Education Credits. We originally
reported that erroneous Education Credits were being allowed nationwide in a
separate Treasury Inspector General for Tax Administration (TIGTA) report
covering the 1999 Filing Season. Based
on the results of our current audit, the IRS continues to allow these credits erroneously
to taxpayers.
We recommended the IRS implement controls to identify and resolve
errors on tax returns with the Education Credit. Specifically, it should implement effective
controls to identify and resolve Education Credit cases where the filing status
is married filing separately or the Adjusted Gross Income is over the maximum
limit. In addition, the IRS should
develop a process to identify and deny the credit to taxpayers that received
the Education Credit and were also claimed as a dependent on another taxpayer’s
tax return during the same tax year.
Management’s
response was due on September 19, 2001.
As of that date, management had not responded to the draft report.
Copies
of this report are also being sent to the IRS managers who are affected by the
report recommendations. Please contact
me at (202) 622-6510 if you have questions or M. Susan Boehmer, Acting
Assistant Inspector General for Audit (Wage and Investment Income Programs), at
(770) 936-4590.
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Outcome Measures
Appendix V – Requirements to Claim the Education Credit
In 1997, the Congress created the
Education Credit,[1] which was designed to assist low- and middle-income
taxpayers with tuition expenses incurred by students pursuing college degrees
or vocational training. The Education
Credit is comprised of two separate credits for post-secondary educational
expenses and became effective for Tax Years 1998 and subsequent. The two separate credits included in this
legislation are the Hope Scholarship and the Lifetime Learning Credits.
This report contains the results
of our review to determine if the Internal Revenue Service (IRS) ensures that
Education Credits are processed correctly.
The audit scope focused on testing controls designed to prevent the
posting of a tax return with an unqualified Education Credit to the IRS
computer system. The review is part of
the discretionary audit coverage under the Wage and Investment Division and the
Treasury Inspector General for Tax Administration’s (TIGTA) Fiscal Year 2001
audit plan.
During the year 2000, the IRS did
not have controls in place to effectively validate the requirements before
allowing the $4.4 billion in Education Credits given to 6.1 million
taxpayers. Although taxpayers provided
information needed to ensure they met basic qualifications, most of this
information was not effectively used to validate the Education Credits.
In addition, the IRS did not
require taxpayers to provide information that would allow the IRS to validate
several other requirements for claiming the Education Credit. Instead, it relied on voluntary taxpayer
compliance to ensure that the 6.1 million taxpayers are qualified to claim the
credit. For instance, the IRS did not
require taxpayers to certify that the student had not completed the first 2
years of post-secondary education or that the student was enrolled in a program
that lead to a degree or certification, both of which are requirements for
claiming the Education Credit. As a
result, the IRS cannot provide reasonable assurance that all the requirements
for claiming the $4.4 billion in Education Credits were met.
We
originally reported that erroneous Education Credits were being allowed
nationwide in a separate TIGTA report covering the 1999 Filing Season.[2] Based on the
results of our current audit, the IRS continues to allow these credits
erroneously to taxpayers.
Although
taxpayers provided information on their tax returns about whether they could be
claimed by someone else as a dependent, their filing status, and their adjusted
gross income amounts (AGI), the IRS did not use the information when it
processed the Education Credits. For
instance, the IRS did not ensure that taxpayers claimed by someone else as a
dependent were denied the Education Credit on their own returns. As a result, the IRS allowed approximately
$19.5 million nationwide in potentially erroneous Education Credits on Tax Year
1999 tax returns processed between January 16 and September 9, 2000. In addition, the IRS did not ensure taxpayers
that filed using the married filing separately filing status or had AGI amounts
over maximum limits were denied the Education Credit. As a result, the IRS allowed approximately
$1.06 million in potentially erroneous Education Credits to taxpayers whose Tax
Year 1999 tax returns were processed either electronically or at the
The IRS needs to implement
controls to identify and resolve errors on tax returns with the Education
Credit. Specifically, it should
implement effective controls to identify and resolve Education Credit cases
where the filing status is married filing separately or the AGI is over the
maximum limit. In addition, the IRS
needs to develop a process to identify and deny the credit to taxpayers that
received the Education Credit and were also claimed as a dependent on another
taxpayer’s tax return during the same tax year.
Management’s Response: Management’s response was due on September 19, 2001. As of that date, management had not responded to the draft report.
Our overall objective was to determine if the
IRS was processing the Education Credit
correctly.
The overall objective of this
review was to determine whether the Internal Revenue Service (IRS) correctly
processed Education Credits. This audit
is one in a series designed to evaluate the IRS’ processing of tax credits
commonly claimed by Wage and Investment taxpayers[3]. This review is
part of the discretionary audit coverage under the Wage and Investment Division
and the Treasury Inspector General for Tax Administration’s (TIGTA) Fiscal Year
2001 audit plan.
We conducted this audit at the
National Headquarters and the
Details of our audit objective,
scope, and methodology are presented in Appendix I. Major contributors to this report are listed
in Appendix II.
Passed as part of the Taxpayer Relief Act of
1997, the Education Tax Credits became effective in TY 1998
Education Credits were included in
the Taxpayer Relief Act of 1997[4] to assist low- and middle-income taxpayers with tuition
expenses they incurred for college degrees or vocational training. The legislation included two types of
Education Credits—the Hope Scholarship Credit and the Lifetime Learning Credit.
1.
The Hope Scholarship
Credit provides a maximum credit of $1,500 per student for each of the first 2
years of post-secondary education. This
consists of a 100 percent credit for the first $1,000 of tuition expenses paid
and a 50 percent credit for the next $1,000 of tuition.
2.
The Lifetime Learning
Credit allows a credit of 20 percent of qualified tuition expenses, up to
$5000, paid by the taxpayer for any year the Hope Scholarship Credit is not
claimed.
Both
credits are available for tuition the taxpayers paid for themselves, their
spouses, or their dependents. The
credits are phased out as the taxpayers’ adjusted gross income (AGI) increases. Taxpayers are no longer eligible for the
Education Credit when their AGI reaches $50,000 (or $100,000 for married
taxpayers filing joint returns). These
credits are nonrefundable and claimed on Education Credits (Hope and Lifetime
Learning Credits) (Form 8863).
In the first 2 years since the creation of the Education
Credit, $7.9 billion was claimed on 10.9 million tax returns.
The number and amount of Education Credits claimed have significantly
increased since the first year of the credit.
For example, between January 16 and September 9, 2000, the IRS reported
that it processed 6.1 million Education Credits totaling $4.4 billion. In the initial year of the Education Credit
(TY 1998), there were 4.8 million returns filed, totaling $3.5 billion in
credits for a combined total of 10.9 million tax returns receiving $7.9 billion
Education Credits in the first two years since its creation.
In a
previous TIGTA review,[5] we reported that, during the credit’s first year, millions
of erroneous Education Credits were allowed to taxpayers.
The IRS did not effectively use the
information provided by taxpayers when it processed 6.1 million Education
Credits for TY 1999.[6] Instead, it
primarily relied on voluntary taxpayer compliance to ensure that the taxpayers
were qualified to claim the credit. As a
result, it did not have a high assurance that all of the credits were
correct.
The IRS did not effectively use taxpayer
information to validate Education Credit claims.
We found that the IRS allowed
$20.56 million in potentially erroneous Education Credits on approximately 31,000
TY 1999 tax returns. Although taxpayers
provided information on their tax returns about their filing status, AGI
amounts, and whether they could be claimed by someone else as a dependent, the
IRS did not effectively use the information when it processed the Education
Credits.
Also, the IRS did not require
taxpayers to provide information about whether they met certain requirements
for claiming the Education Credit. For
instance, the IRS did not require taxpayers to certify that the student had not
completed the first 2 years of post-secondary education or that the student was
enrolled in a program that lead to a degree or certification, both of which
were requirements for claiming the Education Credit.
While the IRS could rely on
subsequent examinations to validate the credits, it did not have an assurance
that these requirements were met before the taxpayers were allowed the credits.
An overview of the requirements
for receiving the Education Credit and whether the IRS validated the
requirements before allowing the Credit is provided in Appendix V.
Information
Provided by Taxpayers Is Not Used to Validate Many of the Requirements for
Millions of Dollars Allowed in Education Credits
Dependency requirements
Taxpayers did not
qualify for the Education Credit if they were claimed as a dependent on someone
else’s tax return.
According to the 1999 Individual
Income Tax Return (Form 1040) instructions, taxpayers did not qualify for the
Education Credit if they were claimed as a dependent on someone else’s tax
return.
We performed
a computer analysis of approximately 6.1 million TY 1999 tax returns and
identified 52,970 tax returns processed nationwide, with Education Credits
totaling approximately $33.5 million, where the taxpayers did not claim
themselves as a dependency exemption.[7]
We reviewed
a statistically valid sample[8] of 321 of these tax returns to
determine if the taxpayer had actually been claimed on another tax return as a
dependent. There were 181 (56 percent)
tax returns in which the credit was allowed although the taxpayers were claimed
as a dependent on another tax return.
These 181 taxpayers received $118,231 in Education Credits. On the remaining 140 tax returns, the
taxpayers qualified for the Education Credit because they were not claimed as a
dependent on another tax return.
We identified taxpayers that were allowed the Education Credit even
though they were claimed as a dependent on another taxpayer’s return.
Based on our
56 percent error rate, the IRS may have erroneously allowed approximately $19.5
million in Education Credits on approximately 29,870 TY 1999 tax returns
processed nationwide.
These
erroneous Education Credits occurred because, during the processing of the tax
returns, the IRS could not determine whether the taxpayers claiming the credit
were claimed as a dependent on another tax return. Only after all tax returns are processed for
the tax year can the IRS make this determination.
AGI limits
According to the 1999 Tax Guide
for Individuals (Publication 17), taxpayers did not qualify for the Education
Credit if their AGI was over $100,000 for a married filing jointly filing
status or over $50,000 for single, head of household, and qualifying widow(er)
filing status.
We identified tax
returns that were allowed the Education Credit although the AGI amounts
exceeded maximum limits.
We performed
a computer analysis and identified 4,241 TY
1999 tax returns processed nationwide, with Education Credits totaling
approximately $4.3 million, and with AGI
amounts over the maximum limits. Our
computer analysis identified 776 tax returns, with Education Credits totaling
$749,907, that were processed either electronically or at the ATSPC or
KCSPC. (In each of these cases, the IRS’
data showed that the taxpayers’ AGI exceeded the limits allowed for this
credit.)
To validate
our computer analysis, we reviewed a random sample of 100 of these tax
returns. In addition to ensuring the
accuracy of our computer analysis, we also reviewed the sample to obtain an
estimate of the number of instances where the IRS data was incorrect.
On 88 of the
100 sampled tax returns (88 percent), the IRS allowed Education Credits
totaling $93,420 although the taxpayers reported AGI was in excess of the maximum
allowable AGI limits. On the other 12
tax returns (12 percent), the IRS data was incorrect. For example, physical review of the returns
showed that there was no entry on the line for the Education Credit and there
was no Form 8863 attached. However, the
IRS incorrectly transcribed an amount for the Education Credit.
If we reduce
our population of 776 error cases by 12 percent (to allow for data errors), we
estimate that the IRS allowed erroneous
Education Credits on 679 tax returns processed either electronically or at the
ATSPC or KCSPC. The total erroneous
Education credit amount associated with these 679 tax returns was calculated to
be $711,691.
While we did
not test the 3,465 Education Credits where the reported AGI was in excess of
the maximum AGI limits that were processed at the other 8 Submission Processing
Centers,[9] we have no reason to believe that
this condition would not also exist in these locations. In addition, our computer analysis showed the
Education Credit was allowed on over 100 TY 1999 tax returns processed
nationwide with AGIs of over $200,000.
These were not the middle-or low-income taxpayers the Education Credit
was created to assist.
Filing status requirement
Taxpayers did not
qualify to claim the Education Credit if their filing status was married filing
separately.
According to the 1999 Form 1040
instructions, taxpayers did not qualify for the Education Credit if their
filing status was married filing separately.
We performed a computer analysis
and identified 2,806 TY 1999 tax returns processed nationwide, with Education
Credits totaling approximately $2 million, and with the married filing separately filing status. Our computer analysis identified 537
of these tax returns, with Education Credits totaling $371,855, that were
processed either electronically or at the ATSPC or KCSPC. (In each of these cases, the IRS’
computerized data showed that the filing status was married filing
separately.)
We identified tax returns that were allowed
the Education Credit although the filing status was married filing separately.
To validate
our computer analysis, we reviewed a random sample of 50 of these tax
returns. In addition to ensuring the
accuracy of our computer analysis, we also reviewed the sample to obtain an
estimate of the number of instances where the IRS data was incorrect.
On 46 of the 50 tax returns (92
percent), the IRS erroneously allowed $27,094 in Education Credits because the
taxpayers’ filing status was married filing separately. In the remaining four tax returns (8
percent), the IRS data was incorrect. For
example, physical review of the return
showed that the IRS incorrectly transcribed the filing status.
If we reduce our population of 537
error cases by 8 percent (to allow for data errors), we estimate that the IRS
allowed erroneous Education Credits on 494 tax returns processed either
electronically or at the ATSPC or KCSPC.
The total erroneous Education credit amount associated with these 494
tax returns was calculated to be $353,262
While we did
not test the 2,269 Education Credits with the married filing separately filing
status that were processed at the other 8 Submission Processing Centers, we
have no reason to believe that this condition would not also exist in these
locations.
These conditions occurred because
the IRS did not have an automated procedure to identify and disallow the
Education Credit when taxpayers used the married filing separately filing
status or their AGI was over the maximum limit.
For the 2000 Filing Season, the IRS postponed programming of the
computer controls designed to both validate the filing status of taxpayers
claiming the Education Credit and disallow
the Education Credit if the taxpayer’s AGI is over the limit based on filing
status. While the IRS had manual
procedures[10] designed to identify these tax
returns, they were subject to the risk of human error.
1.
The Commissioner, Wage
and Investment Division, should develop a process to identify and deny
taxpayers the Education Credit when they were also claimed as a dependent on
another taxpayer’s return.
2.
The Commissioner, Wage
and Investment Division, should automate the controls designed to identify and
resolve returns with the Education Credit when the AGI is over the maximum
limit or the filing status is married filing separately.
Management’s Response: Management’s response was due on September 19, 2001. As of that date, management had not responded to the draft report.
Due to the postponement of computer
programming to validate Education Credits, the IRS could not ensure that all of
the credits were processed properly.
In the 2 years[11] since the inception of the Education Credit, the IRS has
been unable to provide a high degree of assurance that the $7.9 billion given
to 10.9 million taxpayers was appropriate.
The IRS did not have automated controls in place to validate
qualifications for the Education Credit, nor did it require taxpayers to
provide information on certain other Credit requirements.
Appendix I
Detailed Objective, Scope, and
Methodology
Our overall objective was to determine
if the Internal Revenue Service (IRS) ensured that Education Credits were
processed correctly. Specifically, we:
I.
Determined if the IRS
allowed Education Credits on tax returns where the taxpayer was claimed as a
dependent on another return.
A.
Using a computer
extract of the returns transaction file (RTF), identified 52,970 Tax Year (TY)
1999 tax returns processed nationwide between January 16 and September 9, 2000,
where the dependency status indicator was ‘1.’
(NOTE: A ‘1’ in the dependency
status indicator field means the taxpayer did not claim his or her self as a
dependent on his or her own return; therefore, indicating that someone else
could claim him or her as a dependent.)
B.
Reviewed a
statistically valid sample of 321 TY 1999 tax returns from the 52,970 tax
returns identified in Step A. above, to determine an estimate of the number of
taxpayers who received the Education Credit that were actually claimed as a
dependent on another taxpayer’s TY 1999 tax return. (Sample based on 95 percent confidence, 5
percent precision margin, and 70 percent expected rate of occurrence on the
population of 52,970; expected rate of occurrence was determined from a review
of 50 randomly selected tax returns from 12,991 filed electronically or at the
ATSPC or KCSPC that were identified by our computer extract. We validated the 50 tax returns by comparing
information from our computer extract to the physical tax returns.
C.
Identified the
documented manual and electronic controls in place to prevent the IRS from
allowing the Education Credit on tax returns where taxpayers were claimed as a
dependent on another tax return.
D.
Interviewed IRS personnel at national and local levels
to determine their procedures and controls for preventing Education Credits
from being allowed to taxpayers who were claimed as a dependent on another tax
return.
E.
Analyzed and summarized the results of the 321 tax
returns reviewed in the above tests.
II.
Determined if the IRS
ensured taxpayers did not receive the Education Credit when their modified
adjusted gross income (AGI) was $50,000 or more ($100,000 or more in the case
of a joint return).
A.
Using a computer extract of the RTF, identified 4,241 TY
1999 tax returns processed nationwide between
January 16 and September 9, 2000, where taxpayers claimed the Education Credit with filing
status 1 (single), 4 (unmarried head of household), or 5 (widow(er) with
dependent child) and an AGI of $50,000 or more and filing status 2 (married
filing joint) and an AGI of $100,000 or more.
From these, the computer identified 776 TY 1999 tax returns that
were processed either electronically or at the ATSPC or KCSPC.
B.
Validated the data received in the computer extract by
obtaining and verifying information to the IRS’ computer records for 100
randomly selected tax returns filed
electronically or at the ATSPC or KCSPC.
C.
Identified the documented manual and electronic controls
in place to ensure that taxpayers were not allowed the Education Credit when
their modified AGI was $50,000 or more ($100,000 or more in the case of a joint
return).
D.
Interviewed IRS personnel at the national and local
levels to determine the procedures and controls in place to prevent Education
Credits from being allowed to taxpayers whose AGI was in excess of the limits.
E.
Analyzed and summarized the results of the cases
reviewed from the above tests for the 100 randomly selected tax returns.
III.
Determined if the IRS
allowed Education Credits on tax returns with the married filing separately
filing status.
A.
Using a computer extract of the RTF, identified 2,806 TY 1999 tax
returns processed nationwide between January 16 and September 9, 2000, with the
Education Credit and the married filing separately filing status. From these, the computer identified 537 TY
1999 tax returns that were processed either electronically or at the ATSPC or
KCSPC.
B.
Validated the data received in the computer extract by obtaining
and verifying information to the IRS computer records for 50 randomly selected
tax returns filed electronically or at the ATSPC or KCSPC.
C.
Identified the documented manual and electronic controls in place
to prevent the IRS from allowing Education Credits to taxpayers whose filing
status was married filing separately.
D.
Interviewed IRS personnel at the national and local levels to
determine their procedures and controls to prevent Education Credits from being
allowed to taxpayers with the married filing separately filing status.
E.
Analyzed
and summarized the results of the 50 tax returns reviewed in the above tests.
Appendix II
Walter E. Arrison, Assistant Inspector General for Audit
(Wage and Investment Income Programs)
Susan Boehmer, Director
Deborah Glover, Audit Manager
Patricia Lee, Audit Manager
Anthony
Anneski, Senior Auditor
Gregory Dix, Senior Auditor
Karen Fulte, Auditor
John Ojeda, Auditor
Bonnie Shanks, Auditor
Geraldine Vaughn, Auditor
Ron Stuckey, Computer Specialist
Commissioner N:C
Director, Customer Account Services W:CAS
Director, Electronic Tax Administration W:ETA
Director, Submission Processing W:CAS:SP
Field Director, Submission Processing,
Field Director, Submission Processing,
Deputy Chief Financial Officer, Department of the Treasury
Appendix IV
This appendix presents detailed
information on the measurable impact that our recommended corrective actions
will have on tax administration. These
benefits will be incorporated into our Semiannual Report to the Congress.
The overall outcome measure of $20.56 million (31,043
taxpayers) is comprised of 2 separate potential outcomes of Increased
Revenue/Revenue Protection –$19.5 million (for 29,870 taxpayers) and $1.06
million (for 1,173 taxpayers).
Type and Value of Outcome Measure:
·
Increased Revenue/Revenue
Protection – Potential; $19.5 million
(see page 4).
Methodology Used to Measure the
Reported Benefit:
Dependency Requirements - $19.5 million; 29,870 taxpayers
The $19.5 million is comprised of the increased revenue/revenue
protection from creating a process to identify and deny the Education Credit
when the taxpayer is claimed as a dependent on someone else’s tax return.
The methodology used to measure
the $19.5 million included using
automated computer query techniques to identify tax returns with the Education
Credit and on which the taxpayers had not claimed themselves as a dependent,
indicating that someone else could claim them as a dependent. We queried the IRS’ computer system for Tax
Year (TY) 1999 tax returns processed between January 16 and September 9, 2000,
that met our criteria and identified 52,970 tax returns nationwide, totaling
approximately $33.5 million in Education Credits.
We reviewed a statistically valid
sample of 321 of these tax returns to validate the information received from
the query. (Sample based on 95 percent
confidence, 5 percent precision margin, and 70 percent expected rate of
occurrence on population of 52,970.)
These 321 returns were selected from tax returns processed nationwide.
We identified 181 of the 321 (56 percent error rate) tax
returns in which the taxpayer claimed and received Education Credits, totaling
$118,231, while also being claimed as a dependent exemption on someone else’s
tax return. We verified that the
taxpayer was in fact claimed as a dependent on someone else’s tax return
through use of the IRS Integrated Data Retrieval System. The average credit amount for these 181 tax
returns was $653. By applying the error
rate (56 percent) from our sample review against the 52,970 tax returns
identified from our computer query, and then multiplying this number (29,870
tax returns) by the average credit amount from our sample ($653), we estimate
$19.5 million in potentially erroneous Education Credits were allowed to
taxpayers nationwide.
Type and Value of Outcome Measure:
·
Increased
Revenue/Revenue Protection – Potential; $1.06 million; 1,173 taxpayers (see
page 5).
Methodology Used to Measure the
Reported Benefit:
The $1.06 million is comprised of
the increased revenue/revenue protection from creating an automated system to
identify and resolve errors on tax returns claiming the Education Credit. This includes identifying tax returns
claiming the Education Credit with either a married filing separately filing
status or an adjusted gross income (AGI) over the maximum limit.
The methodology used to measure
the $1.06 million included using an automated computer query technique to
identify tax returns claiming the Education Credit and either a married filing
separately filing status or an AGI over the maximum limit filed either
electronically or at the Atlanta or Kansas Submission Processing Center (ATSPC
or KCSPC, respectively). Once we
identified the nationwide population of tax returns processed between January
16 and September 9, 2000, that met these criteria, we reviewed a random sample
of 100 tax returns for the maximum AGI limits criteria and 50 tax returns for
the married filing separate filing status to validate our data.
Adjusted Gross Income Limits - $711,691; 679
taxpayers
By querying the IRS computer
system for TY 1999 tax returns processed between January 16 and September 9,
2000, we identified 4,241 returns processed nationwide with AGI over the
maximum limits, with Education Credits totaling $4.26 million. We reviewed a random sample of 100 tax
returns to validate the information received from our query. These 100 tax returns were selected from
those processed either electronically or at the ATSPC or KCSPC. The makeup of the 100 tax returns included 50
tax returns from married filing jointly taxpayers and 50 tax returns from
either single, head of household, or qualifying widow(er) taxpayers.
There were 776 tax returns, with
total Education Credits of $749,907, processed either electronically or at the
ATSPC or KCSPC. Of these 776 tax
returns, 437 were from married filing jointly taxpayers with AGI amounts over
$100,000 and 339 were from either single, head of household, or qualifying
widow(er) taxpayers with AGI amounts over $50,000.
We identified 88 of the 100 (88
percent error rate) tax returns in which taxpayers actually claimed and
received the Education Credit (totaling $93,420) while having an AGI over the
maximum limit. Of these 88, there were
42 tax returns (84 percent) from married filing jointly taxpayers that received
$46,438 in erroneous Education credits and 46 tax returns (92 percent) from
either single, head of household, or qualifying widow(er) taxpayers that
received $46,982 in erroneous Education credits.
We then estimated the total
erroneous Education credits for tax returns processed either electronically or
at the
Filing Status Requirement - $353,262; 494
taxpayers
By querying the IRS’ computer
system for TY 1999 tax returns filed between January 16 and September 9, 2000,
we identified 2,806 returns with a married filing separately filing status that
received approximately $2 million in Education Credits. We reviewed a random sample of 50 tax returns
to validate the information received from the query. These 50 returns were selected from those
processed either electronically or at the ATSPC or KCSPC. Of the 2,806 tax returns, 537, with total
Education Credits of $371,855, were processed either electronically or at the
ATSPC or KCSPC.
We identified 46 of the 50 (92 percent error rate) tax
returns in which the taxpayer actually claimed and received the Education
Credit (totaling $27,102) while using the married filing separately filing
status. By applying the error rate (92
percent) from our sample review against the total number of tax returns
identified from our computer query (537) we calculated 494 tax returns with
erroneous Education Credits that were processed either electronically or at the
ATSPC or KCSPC. We then applied the
percentage of erroneous Education credit amount (95 percent) from the sample
against the total Education Credit that were processed either electronically or
at the ATSPC or KCSPC ($371,855). This
calculation resulted in $353,262 in
potentially erroneous Education Credits were allowed in TY 1999.
Appendix V
|
Requirement |
Does the Internal Revenue Service (IRS) validate the
requirement before the credit is allowed? |
|---|---|
|
The taxpayer’s filing status
cannot be ‘Married Filing Separately’ (MFS – Filing Status 3). |
Yes. The IRS had manual procedures to disallow
the credit if the filing status was ‘married filing separately’; however, the
controls were not working effectively. |
|
The taxpayer must be able to
claim himself or herself as a dependent on his or her tax return and not be
claimed on another tax return. |
No. The IRS could not determine if the taxpayer
was able to claim himself or herself during returns processing. |
|
The taxpayer’s modified
adjusted gross income (AGI) cannot be $50,000 or more for single, head of
household, or qualifying widow(er) taxpayers and not $100,000 or more in the
case of a joint return. |
Yes. The IRS had manual procedures to disallow
the credit if the AGI was over maximum limits; however, the controls were not
working effectively. |
|
The Education Credit must be
reduced appropriately when the taxpayer’s modified AGI is between $40,000 and
$50,000 for single, head of household, or qualifying widow(er) taxpayers and
between $80,000 and $100,000 in the case of a joint tax return. |
No. The IRS did not have controls in place to
ensure the credit was reduced as the AGI reaches the phase-out range. |
|
The Education Credit cannot
exceed the maximum limits. The Hope Credit limit is
$1,500. The Lifetime Learning Credit
limit is $1,000. |
No. The IRS did not have controls in place to
ensure that the Education Credit did not exceed the maximum limits. |
|
Requirement |
Does the IRS validate the requirement before the credit
is allowed? |
|---|---|
|
The Hope Credit cannot be
claimed for a student who is taking less than half of the normal full-time
work load for his or her course of study for at least one academic period
beginning during the calendar year. |
No. The IRS did not determine if the student
was taking less than half of the normal full-time workload for his or her
course of study for at least one academic period beginning during the
calendar year.[12] |
|
The Hope Credit cannot be
claimed for a student who is not enrolled in a program that leads to a
degree, certificate, or other recognized educational credential for at least
one academic period beginning during the calendar year. |
No. The IRS did not determine if the student
was enrolled in a program that lead to a degree, certificate, or other
recognized education credential for at least one academic period beginning
during the calendar year.[13] |
|
The Hope Credit cannot be
claimed for a student who has completed the first 2 years of post-secondary
education (generally, the freshman and sophomore years of college) as of the
beginning of the calendar year. |
No. The IRS did not determine if the student
had completed the first 2 years of post-secondary education as of the
beginning of the calendar year.[14] |
|
The Hope Credit cannot be
claimed for more than 2 years for each eligible student. |
No. The IRS did not determine if the Hope
Credit was claimed for more than |
|
Requirement |
Does the IRS validate the requirement before the credit
is allowed? |
|---|---|
|
Expenses claimed for the
Education Credit cannot also be claimed as higher education expenses on
Schedule A or C. |
No. The IRS did not determine if the expenses
claimed for the Education Credit were also claimed as higher education
expenses on Schedule A or C.[16] |
|
Qualified tuition and
related expenses must be paid to an eligible educational institution. |
No. The IRS did not determine if the qualified
tuition and related expenses were paid to an eligible educational
institution.[17] |
|
Expenses used to compute the
Education Credit amount must be “qualifying expenses.” |
No. The IRS did not determine if the expenses
incurred were “qualified expenses.”[18] |
|
The taxpayer and/or spouse
cannot be a nonresident alien for any part of the tax year. |
No. The IRS did not determine if the taxpayer
and/or spouse were a nonresident alien for any part of the tax year.[19] |
|
The taxpayer may not have a
felony conviction for possession/distribution of a controlled substance. |
No. The IRS did not determine if the taxpayer
had a felony conviction for possession/distribution of a controlled
substance.[20] |
|
Requirement |
Does the IRS validate the requirement before the credit
is allowed? |
|---|---|
|
The taxpayer must pay
qualified tuition and related expenses for himself or herself, his or her
spouse, or a dependent that is claimed as an exemption on the tax return. |
No. The IRS did not determine if the taxpayer
paid qualified tuition and related expenses for himself or herself, his or
her spouse, or a dependent that was claimed as an exemption on the tax
return.[21] |
[1] Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat.
788 (codified as amended in scattered sections of 5 U.S.C., 19 U.S.C., 26
U.S.C., 29 U.S.C., 31 U.S.C., 42 U.S.C., and 46 app.).
[2] Taxpayers
and the Internal Revenue Service Experienced Problems With Some New Tax
Provisions (Reference Number 2000-40-045, dated March 2000).
[3] The Treasury Inspector General for Tax Administration
(TIGTA) is currently conducting audits of the Adoption, Child and Dependent
Care, Education, Elderly or the Disabled, and Mortgage Interest credits. The TIGTA previously issued audit reports on
the Earned Income Credit (Management
Advisory Report: Administration of the
Earned Income Credit (Reference Number 2000-40-160, dated September 2000)),
and the Child Tax and Additional Child Tax Credits (The Internal Revenue Service Had a Successful 2000 Filing Season;
However, Opportunities Exist to More Effectively Implement Tax Law Changes
(Reference Number 2001-40-041, dated January 2001)).
[4] Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat.
788 (codified as amended in scattered sections of 5 U.S.C., 19 U.S.C., 26
U.S.C., 29 U.S.C., 31 U.S.C., 42 U.S.C., and 46 app.).
[5] Taxpayers
and the Internal Revenue Service Experienced Problems With Some New Tax
Provisions (Reference Number 2000-40-045, dated March 2000).
[6] These figures represent all TY 1999 tax returns processed with the Education Credit between January 16 and September 9, 2000. (All return data available when we obtained the electronic information for review.) All subsequent references to TY 1999 tax returns in this report use this same processing period.
[7] This also indicated that the taxpayer can be claimed as a dependent on someone else’s tax return.
[8] Sample based on 95 percent confidence, 5 percent precision margin, and 70 percent expected rate of occurrence on population of 52,970.
[9] During the 2000 Filing Season, the IRS processed individual income tax returns at 10 Submission Processing Centers.
[10] Our audit did not include an evaluation of the effectiveness of these manual procedures.
[11] Tax Years 1998 and 1999.
[12] We did not test this requirement because specific information about whether the student is taking at least half of the normal full-time work load for his or her course of study for at least one academic period beginning during the calendar year is not provided by the taxpayer on the return.
[13] We did not test this requirement because specific information about whether the student is enrolled in a program that leads to a degree, certificate, or other recognized education credential for at least one academic period beginning during the calendar year is not provided by the taxpayer on the return.
[14] We did not test this requirement because specific information about whether the student has completed the first 2 years of post-secondary education as of the beginning of the calendar year is not provided by the taxpayer on the return.
[15] We did not test this requirement because specific information about whether the Hope Credit has been claimed during the past 2 years is not provided by the taxpayer on the return.
[16] We did not test this requirement because specific information about whether the expenses claimed for the Education Credit are also claimed as higher education expenses on Schedule A or C is not provided by the taxpayer on the return.
[17] We did not test this requirement because specific information about whether the qualified tuition and related expenses were paid to a qualified educational institution is not provided by the taxpayer on the return.
[18] We did not test this requirement because specific information about whether the expenses incurred were “qualified” is not provided by the taxpayer on the return.
[19] We did not test this requirement because specific information about whether the taxpayer and/or spouse was a non-resident alien during the year is not provided by the taxpayer on the return.
[20] We did not test this requirement because specific information about whether the taxpayer has a criminal conviction for possession/distribution of a controlled substance is not provided by the taxpayer on the return.
[21] We did not test this requirement because specific information about whether the taxpayer has paid qualifying tuition and expenses for him or herself, his or her spouse, or a dependent that can be claimed on the return is not provided by the taxpayer on the return.