Errors-Yes; Omissions-No; Fraud-Without a Doubt

This headline in The Washington Post caught my eye this week...

Report: Millions mistakenly claim education tax credit

This is a quote from the story.

As many as 2.1 million taxpayers may have erroneously claimed a total of $3.2 billion by taking advantage of the American Opportunity Tax Credit, which provides up to $2,500 in relief for a college student paying tuition and related expenses. The tax credit, once known as the Hope Scholarship Credit, was expanded as part of the 2009 economic stimulus program.

If this is indeed a mistake or an error it is yet another indictment of our tax system. We have a tax code that is so confusing that our own Treasury Secretary cannot file a correct return.  This is yet another argument for why we should be getting the federal government out of picking winners and losers through our tax system and adopting some type of broad-based tax framework that gets rid of the credits, deductions, exemptions and exclusions in return for lower marginal tax rates.

However, when you look at the actual report that was done by the Treasury Inspector General for Tax Administration ("TIGTA") you have to question whether many of the credits claimed on individual returns were "mistakes" or "errors".  There has to be a good deal of outright fraud involved as well.

Here is a breakdown of some the "mistakes" the TIGTA found.

• 1.7 million taxpayers received $2.6 billion in education credits for students for whom there was no supporting documentation in IRS files that they attended an educational institution.
• 370,294 individuals claimed as students were not eligible because they did not attend the required amount of time and/or were postgraduate students, resulting in an estimated $550 million in erroneous education credits.
• 68,713 taxpayers erroneously received $88.4 million in education credits for students claimed as a dependent or spouse on another taxpayers's tax return.
• 250 prisoners erroneously ( TIGTA's word) fraudulently (my word) received $255,879 in education credits.

The Washington Times reports in audits conducted so far by the Internal Revenue Service for tax returns of individuals claiming students for whom the IRS has no supporting documentation, 72% of the claims are erroneous.

Whether all of this this relates to "mistakes", "errors" or "fraud" it should be clear we need to tear out the current Internal Revenue Code by the roots.  Whether it is Herman Cain's 9-9-9 Plan, Rick Perry's Flat Tax or the Simpson-Bowles Tax Reform Blueprint, we need to drastically cut these tax preferences and level the playing field.  Let's let the federal government raise the revenues they need through the tax system and get them out of social engineering and the Redistribution of America. 

A major problem with the American Opportunity Tax Credit compared to its predecessor is that it is a refundable tax credit up to a total of $1,000.  This means that even if someone does not pay any income taxes they still can get a payment from the federal government.  In effect, it is a direct use of the tax system to pay a federal subsidy to an individual.  Refundable tax credits have been increasingly utilized in recent years because almost half of taxpayers do not owe any federal income taxes.  If you don't owe any income tax, a tax credit does you no good.  Making the tax credit refundable solves that problem.  You get the money even if you don't pay any taxes.  It is also a magnet for fraud.  Would 250 prisoners being filing for a higher education credit if it only could offset regular income taxes and not produce cold cash for them?

The American Opportunity Tax Credit is another great liberal idea (yes, it was part of the Obama stimulus program expanding the previous Hope Scholarship Credit enacted under President Clinton) that is well-intentioned.  However, as the report indicates, too much of the money gets into the wrong hands.  We just cannot afford these ill-designed programs.