Treasury report: $3.2 billion overpaid in college tax credits

More than 2 million taxpayers—including some prisoners claiming students as dependents—wrongly collected $3.2 billion in college tax credits last year, according to a report issued today by a federal investigator. The credits in question represent more than one-fifth of the $15.5 billion in college credits that, in total, went to nearly 8.9 million taxpayers through 2010, the report says. The Internal Revenue Service, however, is disputing the findings, saying they’re vastly overblown and based on a faulty analysis. The IRS nonetheless agreed to implement many of the recommendations made in the report to ensure only eligible taxpayers receive the credit. The program at issue is the American Opportunity Tax Credit, created in President Barack Obama’s $825 billion economic stimulus law of 2009. Extended by Congress last year through 2012, it provides students with tax credits of up to $2,500 annually, as long as their families don’t exceed income limits. The report by the Treasury Department’s inspector general says $2.6 billion went to 1.7 million taxpayers during the first five months of 2010 for students for whom the IRS lacks documents proving they actually attended school. Another $550 million went to 371,000 taxpayers for students who didn’t qualify because they didn’t attend school long enough or were graduate students. Nearly 64,000 taxpayers received $88 million in credits for students who were listed as a dependent or spouse on someone else’s tax return. In addition, 250 prisoners who were in custody for all of 2009 erroneously got $256,000 in credits.