Not surprisingly, tax fraud is rampant in the area of education credits and the tuition deduction. According to the Treasury inspector General for Tax Administration (TIGTA) 3.6 million taxpayers claimed over $5.6 billion in potentially
erroneous education tax credits in 2012. Of over 10 million claims for the American Opportunity Tax Credit, 2.5 million were not supported by a Form 1098-T. As a result of this report, the IRS will audit more returns on which education credits are taken. Also of interest in the report is that in 2013 there were 2,300 claims for individuals under the age of 14 and 3,000 over age 80.

One must wonder how effective and extensive this effort will be, given budgets cuts imposed on the IRS coupled with the additional responsibilities given the agency. Likely, the IRS has bigger fish to fry. However, taxpayers should be aware of increased efforts in this area. If you take the credits, they can be an audit flag.

It seems that there are two major reasons for the occurrence of fraud in this area. One is confusion about what is allowed for the various credits. The second is inconsistencies in the reporting through Form 1098-T. There are multiple options for getting a tax break for education expenses that include two credits and a deduction. A student may only select one option in a given year. The credits are the Lifetime Learning Credit and the American Opportunity Tax Credit (AOTC). In addition, the tuition and fees deduction is available as a for AGI adjustment. It is not the purpose of this article to discuss the details of each of the three, but to point out the differences that may give rise to confusion about them.

The AOTC may be taken for up to four years and the student must be enrolled at least half time in an eligible education institution. Eligible expenses are tuition and required fees plus course-related books, supplies, and equipment. The Lifetime Learning Credit may be taken any number of times and only requires enrollment in one course. Eligible expenses are tuition and required fees plus-course related books, supplies, and equipment, but only if paid to the educational institution as a condition of enrollment. The requirements for the deduction are similar to that hose for the Lifetime learning Credit.

In addition to the above, taxpayers may utilize a Qualified Tuition Plan (529Plan) in which the earnings are tax free. These plans may include payments for room and board for students enrolled at least half-time and payments for special needs services. Other tax programs with education benefits include Coverdell Education Savings Accounts which are limited in the amount involved but may include K-12 expenses; U. S. savings bond interest exclusion; and penalty-free IRA distributions. Each of these have differing conditions and covered expenses.

With the multiplicity of options for tax savings on education expenses, it is likely that some of the erroneous claims are simply a misunderstanding of the law rather than outright fraud. However, there is no doubt that there is a great deal of fraud perpetrated in this area.

Until the 2015 tax year, the presence of a 1098-T was not required in order to take an education credit or deduction. Under legislation passed in that year, taxpayers must have a Form 1098-T in order to claim the education credits or tuition and fees deduction. This will be effective beginning with tax year 2016. This change should reduce the amount of fraudulent education expense claims. But it is unlikely to eliminate fraud, as the 1098-T cannot capture all eligible expenses. It does seem to be a step in the right direction, however.

This requirement does present at least one potential problem for educational institutions. Many, if not all, institutions no longer use the student’s social security number as an identifier. In order to properly prepare and issue the Form 1098-T the college or university will need to obtain the student’s social security number.

Seven different programs are available to assist taxpayers in paying for educational expenses. With the multiplicity of options, parents and students certainly will have a level of confusion about these programs. In addition, they may not choose the optimal course for taking advantage of these opportunities. Also, with complexity, come the opportunity for fraud. Why not simplify the available alternatives for tax breaks for education?