More than 2 million taxpayers _ including some prisoners claiming students as dependents _ apparently wrongly collected $3.2 billion in college tax credits last year, according to a report issued Thursday by a federal investigator.
The suspect credits represent more than a fifth of the $15.5 billion in college credits the report says went to nearly 8.9 million taxpayers through 2010.
The Internal Revenue Service disputed the findings, saying they were vastly overblown and based on a faulty analysis. The IRS, though, agreed to implement many of the recommendations the report made to ensure that only eligible taxpayers receive the credit.
The program in question is the American Opportunity Tax Credit, created in President Barack Obama's $825 billion economic stimulus law of 2009 as an expansion of the Hope Scholarship Tax Credit. 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 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.
Just over half the tax returns in question had been filed by a paid tax preparer, the report said.
"Based on the results of our review, the IRS does not have effective processes to identify taxpayers who claim erroneous education credits," the report said. It added that the IRS is not ensuring that the stimulus funds are used "for authorized purposes and that every step is taken to prevent instances of fraud, waste, and abuse."
In a written statement Thursday, the IRS said the report "substantially overstates" the wrongly paid tax credits. It also said it was "inaccurate and unfair" for the inspector general to conclude that credits had been erroneously paid in instances when investigators could not match tax returns to information forms colleges are supposed to file with the IRS about students.
The IRS agreed to adopt several of the recommendations that the inspector general suggested, including revising tax forms to require information on the college a student is attending and trying to get information on students from the Education Department.