The federal Hope Credit is intended to make the first two years of college universally available, by allowing taxpayers to receive dollar for dollar a certain percentage of amounts paid. At higher income levels, eligibility phases out. In addition, the credit is not to be claimed for the same student - enrolled on at least a half-time basis -- beyond the year when the student completes the first two years of college. To prove the amounts paid and/or billed for qualified tuition and related expenses, students are issued Tuition Statements (Form 1098-T) from the institutions of higher learning. Taxpayers who wish to claim the Hope Credit must fill out tax Form 8863, using the information provided on Form 1098-T. Recently, the Treasury Inspector General for Tax Administration (TIGTA) took a look to see if the above rules are sufficient to ensure the Hope Credit has been administered properly. The results were disappointing.
TIGTA examined tax years 2004- 2007 in two separate computer runs. The results showed that the regulations are not effective to ensure the credit is claimed properly. In the first computer run 203,000 taxpayers received the Hope Credit for three consecutive years (2004-2006) for the same students. The average credit incorrectly claimed was $1,500 for a total of $300 million. Fifty-eight thousand taxpayers claimed the credit for four consecutive years (2004-2007), totaling nearly $80 million.
Another computer run revealed that 168,000 taxpayers claimed the credit for three consecutive years (ending with 2007). The average credit inappropriately claimed was $1,400 and totaled over $232 million.
How did this happen?
Two problems were identified. First, the IRS does not have math error authority to immediately disallow claims for the Hope Credit for the same student for more than two years. The IRS can and does examine returns that claim Hope Credits after the refunds are issued, but the criteria the tax agency uses are not sufficient to identify the vast majority of errors.
In addition, the information provided by educational institutions on Forms 1098-T is not relevant to determining eligibility for the credit. Internal Revenue Code Section 6050S requires schools to issue these forms, as a way to assist in determining the amount of qualified tuition and expenses paid. According to the law, schools must report either the amounts received for qualified tuition and related expenses, or the amount billed for the same, even though the only relevant information is the amount received. Unfortunately, in 80 percent of the forms reviewed, the amount received was left blank. Processing of these forms requires educational institutions to expend 5.1 million hours each year, and costs an estimated $3.8 million to mail the forms to students. Even so, TIGTA was informed that the IRS does not use the information on Forms 1098-T in its matching program, and does not accept Form 1098-T as proof of educational expenses.
What should be done to fix these problems?
On the question of credits taken for more than two years for the same student, TIGTA recommended that the IRS be granted math error authority to immediately disallow these improper credits.
The IRS agreed.
TIGTA also recommended that legislation should be passed to require educational institutions to report the amounts paid rather than the amounts billed on Form 1098-T, and that Form 8863 should contain specific line items that make it matchable to the information on Form 1098-T.
In response, the IRS agreed. Pending the passage of such legislation, the IRS agreed to change Form 1098-T and Form 8863 to comply with the new law.
You can read the full TIGTA report.