June 29, 2015

It’s obvious that taxpayers aren’t eligible for the American Opportunity Credit when they don’t have any qualified educational expenses, but it may not be as clear to taxpayers that they are responsible for the accuracy of their federal income tax returns – even when they pay a tax preparer to file for them.

William Billy Devy, a Florida resident, had his 2011 Form 1040 tax return prepared by a tax return preparation service known as “Tax Whiz.” Tax Whiz prepared his return and claimed both the standard deduction and an American Opportunity Tax Credit of $2,500, the maximum amount of the credit that can be claimed.

The credit caused the return to have an overpayment of $1,853. Then the entire refund amount of $1,853 was taken away from the taxpayer due to an outstanding child support debt with the state of New York.

On Oct. 7, 2013, the IRS sent Devy a statutory notice of deficiency. The IRS had disallowed the American Opportunity Credit.

Generally, the credit relates to qualified educational expenses paid or incurred at a qualified educational institution. These expenses are reported on a Form 1098 T Tuition Statement. The educational institution is required to send a copy of the Form 1098 T to the taxpayer as well as the IRS.

When taxpayers claim the American Opportunity Credit on their return, the IRS matches the information on the return with the information provided to it on Form 1098 T. If these items don’t match, the IRS usually investigates the matter. That is what happened in this case and why a statutory notice of deficiency was sent.

Devy did not dispute the disallowance of the $2,500 credit. In fact, he was upfront about not having any qualified educational expenses. He explained that the tax service had prepared his return and claimed this credit without his permission.

The taxpayer has a duty to review his return before submitting it. Devy admitted that he had not reviewed his return before it was e-filed.

Court cases have supported the position that reliance on a tax preparation service does not absolve the taxpayer from the responsibility of filing an accurate return. Even if Tax Whiz claimed the credit without Devy’s knowledge, he is still responsible for the resulting deficiency.

Because Devy did not have any qualified educational expenses to support his claim for the American Opportunity Tax Credit, the court disallowed the credit. Devy was responsible for the deficiency of $2,500.

In addition, the court ruled that it did not have jurisdiction to determine whether the offset of the refund due to a past child support claim was legal (William Billy Devy v. Commissioner, U.S. Tax Court, T.C. Memo 2015-110, June 15, 2015).

This article was originally posted on June 29, 2015 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com.