Waste of the Day: Tuition Tax Credit Disaster

Topline: Physically attending college from behind bars is an impossible feat, but that did not stop the Internal Revenue Service from mistakenly giving 250 prisoners a tax credit to help cover undergraduate tuition in 2011.

Inmates do not pay tuition – so why did the IRS grant them tuition tax credit?

While many state and federal prisons offer credit-bearing courses, vocational certificates, and associate or bachelor’s degrees, the inmates are still in prison and not paying tuition.

The IRS error was representative of a much broader issue: 1.7 million people received the tax credit without submitting any proof that they were a student, costing the federal government $3.2 billion. The money would be worth $4.8 billion today.

That’s according to the “Wastebook” reporting published by the late U.S. Senator Dr. Tom Coburn. For years, these reports shined a white-hot spotlight on federal frauds and taxpayer abuses. 

Coburn, the legendary U.S. Senator from Oklahoma, earned the nickname “Dr. No” by stopping thousands of pork-barrel projects using the Senate rules. Projects that he couldn’t stop, Coburn included in his oversight reports.   

Coburn’s Wastebook 2012 included 100 examples of outrageous spending worth more than $18 billion, including the IRS’ erroneous tax credits.

What was the tuition tax credit program all about?

Key facts: The American Opportunity Tax Credit lets college students or their parents write off $2,500 in tuition costs per year. But weak internal controls allow the credits to go to millions of people who may not be students.

Nearly 75% of the credits in 2011 went to people with “no supporting documentation that they attended an educational institution.” That included 84,754 people with no Social Security number and 63,000 students whose tuition was used as a write-off on both their own tax return and their parents’.

More than half of the erroneous claims were filed by professional tax preparers.

The tax credit remains a huge source of mismanagement today. The IRS estimates that 31% of recipients in 2025 submitted no records proving they were a student, costing the government $1.5 billion.

Search all federal, state and local salaries and vendor spending with the world’s largest government spending database at OpenTheBooks.com. 

Summary: Like a student that keeps failing the same class, Washington has been losing money to the same sources of fiscal waste for years. It’s past time to strengthen verification processes in tax credit approvals.

The #WasteOfTheDay is brought to you by the forensic auditors at OpenTheBooks.com.

This article was originally published by RealClearInvestigations and made available via RealClearWire.