Bogus Education Credits?

Many news sources today have reported that IRS may have issued 5.6 billion in bogus education credits. This comes from a report from the Inspector General after reviewing statistics from the 2012 tax year. They reached this conclusion because total education credits claimed on returns exceeds the total amount of eligible expenses reported on Form 1098-T by roughly 5.6 billion dollars. Everyone likes to complain about government incompetence, especially when it involves the IRS, but I see a couple of problems with the report. The main problem is that Form 1098-T (issued be eligible educational institutions) routinely does not include all of the costs that are eligible for one or more of the education credits. There are 3 types of education benefits available for college expenses. There is the tuition and fees deduction, the Lifetime Learning Credit, and the American Opportunity Credit. The qualifications for who can claim the credits and what expenses qualify vary depending on which credit/deduction you are claiming.  A detailed discussion of this can be found in Publication 970, but I wanted to point out one key difference which applies to the 1098-T. The Lifetime Learning Credit explained in IRC §25A(f)(1) is for qualified tuition and fees related to enrollment or attendance at an eligible educational institution. For the American Opportunity Credit found in IRC§ 25A(I)(3) in addition to the above expenses you can also include course materials such as textbooks and other required supplies. The Form 1098-T usually only shows the tuition paid and frequently does not include textbooks etc. So, for those eligible for the AOC, you could be short changing yourself if you only show the amount from the 1098-T. There are clearly people who file their returns and claim incorrect education credits: some because of lack of understanding of the requirements and others who perhaps are deliberately cheating. But, simply comparing 1098-T forms to the total education credits claimed does not create an accurate picture of how many credits may have been claimed incorrectly.