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Saturday, October 29, 2011

Higher Education Tax Breaks Violate Several Principles of Good Tax Policy

Laura Saunders' Wall Street Journal article of 10/29/11 - "Back to School" includes a nice summary of many of the numerous special rules in the federal income tax that provide a tax break for either saving for high education costs or currently incurring them. I have written before about the problems many of these provisions post by being in the tax law (such as 3/8/11 and 3/22/11). These provisions, such as deductions for higher education expenses and $2,500 tax credits for each of the first four years of college) violate principles of equity, neutrality, simplicity and transparency. As noted in a report issued last week by the Treasury Inspector General's office (TIGTA), they also violate the minimum tax gap principle.

The title of the press release of the TIGTA report says a lot - 2.1 Million Taxpayers May Have Received $3.2 Billion in Erroneous Education Tax Credits (10/20/11). Worse yet, 52% of these returns were prepared by a paid preparer. I think that notes the complexity of the provisions. Also noted:

"Other findings include:
  • 370,924 taxpayers received an estimated $550 million in education credits for which they were not eligible because they did not attend college for the required amount of time and/or were post-graduate students.
  • 84,754 students who did not have a valid Social Security Number (SSN) were claimed by taxpayers who received $103 million in education credits. Each of these students had an Individual Taxpayer Identification Number (ITIN).
  • 63,713 taxpayers erroneously received an estimated $88.4 million in education credits for students claimed as dependents or spouses on another taxpayer’s tax return; and, 250 prisoners erroneously received $255,879 in education credits. Additionally, an estimated 52 percent of the returns with potentially erroneous education credits were prepared by paid tax preparers, who should have been aware of the eligibility requirements.

“Based on the results of our review, the IRS does not have effective processes to identify taxpayers who claim erroneous education credits,” said J. Russell George, Treasury Inspector General for Tax Administration. “If not addressed, this could result in up to $12.8 billion in potentially erroneous refunds over four years,” Mr. George added."

Among the 11 recommendations made by TIGTA, is the following (#2):

"Revise the Form 8863 to require taxpayers to provide identifying information for the educational institution that the student(s) being claimed for the education credits attended. This identifying information should include the name, address, and Federal EIN of the educational institution. In addition, the form should be revised to include specific information supporting key eligibility requirements that could be used to verify requirements were met which may serve as a deterrent for those taxpayers who intend to erroneously claim these credits."

Other recommendations include having the IRS pursue the erroneous claims and having Congress modify the law to give the IRS "math error authority" to allow for earlier identification of the errors. (footnote 23 of the report defines "math error authority" as "granted by Congress and allows the IRS to identify calculation errors and obvious noncompliance. This provides an administrative benefit to the IRS because it can correct certain errors during tax return processing without having to wait to audit a taxpayer’s return.")

Some solutions:

  1. Any credit or special deduction enacted by Congress should include "math error authority" for the IRS.
  2. Congress should stop creating new tax deductions and credits. If the benefits connected to them are so worthwhile, they should find a better spot for them. For example, if the education credits were instead offered as scholarships or larger Pell grants, this issues of them being given to people not even in college or without the proper identification would not happen. Also, the dollars could be distributed based on needs (those seeking Pell grants and other scholarships complete a FAFSA form) and they would be distributed when needed - when tuition is due!
  3. Reduce the number of existing tax expenditures and use the extra dollars generated to pay down the deficit and keep lower rates for those using them (generally those under $150,000) by keeping their lower rates after 2012.
What do you think?

1 comment:

nctaxpro said...

Agree entirely that Form 8863 should be modified to include the identifying details for the school. Many schools report the info on Form 1098-T as it stands, so it shouldn't be that difficult for the IRS to match up the forms (he says, realizing that nothing is simple when it comes to the IRS...)