The IRS has revealed that the tax preparer exam will contain multiple questions covering tax credits. Among these topics are the education tax credits that are commonly involved in tax preparation work.
A typical process for a tax practitioner is identifying whether an eligible person incurred higher education expenses. However, each education credit has distinctive qualifications for the types of expenses and student eligibility. Because of these variances, tax preparation software doesn’t automatically determine the correct tax credit. Instead, tax preparer study is required each year to affirm the information needed to correctly apply education credits.
The Taxpayer Inspector General for Tax Administration (TIGTA) has released a report of its finding that 2.1 million tax returns erroneously claimed $3.2 billion of education tax credits for the 2009 tax year. Such abuse is an area the registered tax return preparer program can address by required tax education. The particular credit identified in the TIGTA report is the American Opportunity Credit. This credit was temporarily implemented as a generous successor to the Hope Credit and has been extended for the 2011 tax year.
The maximum amount of the American Opportunity Credit is $2,500. This is determined by using 100 percent of the first $2,000 of higher education expenses and 25 percent of the next $2,000 spent. A key advantage of the American Opportunity Credit that’s explained in a registered tax return preparer course is that it applies to every eligible student. It is not limited to a cap amount per tax return like the $2,000 maximum for the Lifetime Learning Credit.
Definition of an eligible student for the American Opportunity Credit is stricter than the Lifetime Learning Credit. A tax preparer study guide explains that eligible students for the American Opportunity Credit must have at least half of the normal course load for a minimum of one academic period during the year. In addition, this education credit is only available for students who are pursuing a degree or similar program for a recognized credential. The Lifetime Learning Credit doesn’t require working toward a degree with at least half-time course work for one semester.
The TIGTA report identified 361,467 American Opportunity Credit claims for students who attended less than half time or were graduate students, which are beyond the first 4 years of secondary education eligible for the credit. Another 63,713 instances incorrectly claimed the credit for taxpayers who were allowed as dependents on another person’s tax return. A major detail in tax return preparer training is that individuals cannot claim the American Opportunity Credit who could be or are claimed as dependents of others. The American Opportunity Credit is available to a primary taxpayer and spouse along with anyone they may claim as dependents.
The American Opportunity Credit is partially refundable and thus vulnerable to the same false claims as the Earned Income Tax Credit. Up to 40 percent of the credit is refundable, but not for most students under age 24. They can’t claim the refundable part of the American Opportunity Credit if they provided less than half their own support, were not filing joint tax returns, and had at least one living parent.
The most alarming statistic in the TIGTA report was 1,700,653 students claiming the American Opportunity Credit who did not even attend an educational institution. A startling 63 percent of these returns had a paid tax preparer professional. This has an appearance of outright fraud rather than mere mistakes. As the IRS is challenged to curb such abuses, control over the training and continuing education for tax preparers becomes increasingly important.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
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