The Internal Revenue Service (IRS) faces challenges ensuring compliance with the eligibility requirements of the Hope and Lifetime Learning tax credits. Millions of taxpayers claim the credits to offset qualified postsecondary education expenses. For fiscal years 2009 through 2013, taxpayers are estimated to claim Hope and Lifetime Learning credits totaling $27 billion and $13 billion respectively. These tax provisions are complicated and may lead taxpayers to claim either more or fewer benefits than they are entitled.
IRS requires educational institutions to report on Form 1098-T information about qualifying educational expenses to taxpayers and IRS. However, the information reported by educational institutions and sent to the IRS and taxpayers (on Form 1098-T) is not easily comprehensible to taxpayers, nor is this information fully used by IRS in its compliance programs.
IRS does not make full use of information reported by educational institutions to taxpayers and IRS on Form 1098-T to identify and correct noncompliance with higher education tax benefits. In addition, revising the form to provide more complete information on qualified expenses could make it easier for taxpayers to use, which could also reduce noncompliance. IRS requires institutions to report on Form 1098-T either (1) the amount of payments received or (2) the amount billed for qualified expenses. Many institutions report the amount billed and do not report payments, but the amount billed may not equal the amount that can be claimed as a credit. For example, the amount billed may not account for all scholarships or grants the student received. In such cases, the Form 1098-T may overstate the amount that can be claimed as a credit, confusing taxpayers. Conversely, if institutions are not providing information on other eligible items, such as books or equipment, taxpayers might be understating their claims.
Because the amount billed may not be the amount taxpayers are eligible to claim as a credit, IRS does not compare tuition statement information to information reported on a tax return. However, IRS is missing opportunities to use some of the more basic information (for example, a student's Social Security number and a school's location) to verify eligibility for the credit. Using IRS's compliance computer-matching systems to automatically compare information on statements to taxpayers' claims could be a low-cost enforcement tool for IRS to verify certain aspects of taxpayers' eligibility for higher education credits. While changing the requirements for how higher educational institutions report qualified expenses on tuition statements would likely impose some burden on those institutions, the additional burden could be low because the institutions are already required to complete Form 1098-T.
Given that every year millions of taxpayers claim billions of dollars of credits for post-secondary education tuition expenses, even a small increase in compliance could increase revenue. To reduce taxpayer confusion and enhance compliance with the eligibility requirements for higher education benefits, GAO recommended in December 2009 that IRS (1) determine the feasibility of using current information reported on Form 1098-T in its compliance computer matching systems; and (2) revise Form 1098-T to improve the usefulness of information on qualifying education expenses. IRS agreed to consider the feasibility of using current information on Form 1098-T in its compliance programs, and develop a plan to address possible changes to that form but these actions have yet to be completed. GAO continues to believe these actions are needed since automatically matching readily available information has been a proven, low-cost way to improve compliance.
The information contained in this analysis is based on the related GAO product listed under the "Related GAO Products" tab and GAO's work following up on the recommendations from that product.
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The Internal Revenue Service's (IRS) filing season is an enormous undertaking that includes processing tax returns, issuing refunds, and responding to taxpayer questions. IRS's efforts to ensure compliance begin during the filing season. GAO was asked to assess IRS's 2009 filing season performance, identify ways to reduce taxpayers' use of short-term, high-interest refund anticipation loans (RAL)...
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