Obama Stimulus Pays $3.2 Billion In Tax Credits Incorrectly

Obama Stimulus Pays $3.2 Billion In Tax Credits Incorrectly
They haven't got a clue where all this money is going.
by John Hayward 10/21/2011

One of the many programs packed into Barack Obama​’s failed trillion-dollar “stimulus” package was called the American Opportunity Credit. This targeted tax credit of up to $2,500 per year was meant to help cover college expenses for the dependents of those with a maximum adjusted gross income of $80,000, a higher income level that comparable previous programs allowed. Smaller credits are available for those who earn up to $90,000 per year. The new credit is also good for the first four years of college, instead of just the first two.

The IRS explains that the American Opportunity Credit can be claimed on “expenses for course-related books, supplies, and equipment which are not necessarily paid to the educational institution,” as well as tuition. Would it cover a computer? Well, says the IRS, that “depends on the facts,” such as whether “the computer is needed as a condition of enrollment or attendance at the educational institution.”

Non-qualified expenses include room and board, transportation, insurance, medical expenses, and certain student fees. To figure all of this out, and determine eligibility, the IRS produced Form 8863, which is two pages of the usual Internal Revenue spread-sheety goodness. It’s very important to make sure only qualified individuals claim the carefully targeted tax credits designed by our brilliant elites, whose wisdom now runs into 3.8 million words of tax law.

Except somehow, as the Associated Press reports, the Inspector General of the Treasury Department has determined that the American Opportunity Credit was overpaid by $3.2 billion. That’s “more than a fifth of the $15.5 billion in college credits the report says went to nearly 8.9 million taxpayers through 2010.” Behold the fiscal carnage:

The report by the Treasury Department's inspector general for taxes found that for the first five months of 2010, $2.6 billion went to 1.7 million taxpayers for students for whom the IRS lacked documents showing that they 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. IRS guidelines require a taxpayer to provide at least half of someone's support before claiming them as a dependent - which the report said was unlikely for people in prison.

The Treasury report concludes that “the IRS does not have effective processes to identify taxpayers who claim erroneous education credits,” and is not ensuring stimulus funds are “used for authorized purposes and that every step is taken to prevent instances of fraud, waste, and abuse." The IRS claims the Inspector General’s report “substantially overstates” the incorrect credits, and curiously, asserts that it’s “unfair” to conclude the credits were paid incorrectly when tax returns don’t match up with the forms filed by colleges.

The IRS’ defense blows a hole in one of Big Government’s core principles: that it can carefully mold society through the precise application of incentives and penalties. In reality, the government simply loses track of billions, paid out to people who didn’t qualify under all those carefully-tuned rules… including prisoners who spent the whole year in custody. And we’re told it’s “unfair” to assume errors when two gigantic piles of complex paperwork don’t match up! The implication is that expecting the system to work within reasonable parameters of accuracy is unreasonable. Why are Americans pushing all that paperwork if the government doesn’t expect the numbers to add up?

It wasn’t long ago that we learned $4.2 billion in refundable tax credits had been paid out to illegal aliens. Now we’ve got billions of stimulus dollars floating away to people who didn’t qualify for them, even though Americans spend over 6 billion hours per year filling out all those tax forms. The pretense that our federal leviathan can somehow manage an economy that it cannot accurately perceive is laughable. The notion of using a torturous body of tax law to shape social behavior, instead of collecting minimal revenue for a lean government with the simplest tax laws possible, stopped being funny a long time ago.
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To read another article by John Hayward, click here.