The American Opportunity Tax Credit provides up to $ 2,500 per eligible student for qualified educational expenses (e.g., tuition, books, supplies) at the undergraduate level. Up to forty percent of the credit - or $1,000 - is refundable.
According to a recent Treasury report, the government has erroneously granted and taxpayers have wrongly received nearly $3.2 billion in American Opportunity Tax Credits. The report attributes this $3.2 billion error to ineffective IRS procedures for the review of education credits. To this end, the Treasury has forecasted that an additional $12.8 billion in wrongfully claimed education credits will be granted over the next four years under the current system of review.
In the wake of this report, the IRS has announced that it will closely scrutinize all tax returns that claim education tax credits going forward.
The good news is that the Treasury will save $12.8 billion over the next four years that it would have otherwise erroneously paid out in the form of wrongly claimed education credits. The bad news is that taxpayers claiming education credits will have their returns more closely scrutinized. In this regard, it is important not only to ensure that any education credits claimed are bona fide, but also that the tax return is accurate in all other respects since the return will be isolated for closer review.
Not only will the IRS more closely scrutinize tax returns that claim education credits, but it will also require taxpayers to provide more documentary support than in the past for any education credits claimed. The IRS is currently revising Form 8863, which is used to claim the Opportunity credit, and beginning in 2012, taxpayers claiming this credit must identify their educational institution on the Form 8863.
In addition, the IRS is considering a joint effort with the Department of Education whereby the Department would provide educational information to the IRS that could be used to verify taxpayers' eligibility for the credit.