Hundreds Of Thousands Of Taxpayers Thought To Be Impacted By Education Credit Snafu (Forbes)

Tax season is proving to be a major headache for taxpayers this season. And it looks like it’s not about to get better for hundreds of thousands of taxpayers who claimed the American Opportunity Credit or the Lifetime Learning Credit on their personal income tax returns.

To claim the credit, taxpayers must file a federal form 8863, Education Credits (downloads as a pdf). The Internal Revenue Service changed the forms 8863 this year to comply with due diligence requirements imposed by Congress. The changes were noted on the instructions to the form as follows:

Specifically, the changes involved the questions at lines 23-26. Those questions are:

• Has the Hope Scholarship Credit or American opportunity credit been claimed for this student for any 4 prior tax years?
• Was the student enrolled at least half-time for at least one academic period that began in 2012 at an eligible educational institution in a program leading towards a postsecondary degree, certificate, or other recognized postsecondary educational credential?
• Did the student complete the first 4 years of post-secondary education before 2012?
• Was the student convicted, before the end of 2012, of a felony for possession or distribution of a controlled substance?

Almost immediately after the release of the form,for which processing was delayed until mid-February, IRS began seeing a problem. The checkboxes at lines 23-26 were showing on their end as blank for a number of taxpayers.

In response, the IRS issued an alert to tax professionals on February 20, reminding preparers about the check boxes on the revised forms. That alert said, in part:

We have observed instances in which the Form 8863,Education Credits, attached to the Form 1040 and 1040A is not completed correctly. These instances are causing downstream processing delays. We have experienced the following two conditions: (1) The Form 8863 Part III Line 25 Yes or No checkboxes are not completed when required and (2) The Form 8863 Part III Line 26 Yes or No checkboxes are not completed when required.
…

In the interim, we request that software packages be modified to require completion of the correct boxes on lines 25 and 26 when appropriate. Additionally the appropriate checkboxes should be completed for lines 23 and 24. Also please communicate this information to the practitioner community to avoid delays in processing returns.

Some of the incomplete returns appeared to be human error, some of them were prepared by taxpayers using software packages and some of them were prepared at tax preparer offices. What a number of them had in common, however, was that they were related to H&R Block. H&R Block eventually acknowledged as much on its Facebook page:

H&R Block has confirmed with the IRS that there was an issue with certain tax returns filed before February 22, 2013 that included certain education tax credits claimed on Form 8863. We have worked with the IRS to expedite a solution to this issue for all of our affected clients.

If you received this letter of notice requesting additional information for Form 8863 and already responded to the IRS, or have not received a notification to date, there is no additional action needed at this time.

The delays, however, kept coming. And taxpayers who filed even after the February 22 date were running into walls.

On March 8, 2013, the IRS issued a second alert which advised:

To avoid delays, ensure your clients complete Form 8863 correctly.

I reported as much over the weekend and was inundated with emails and comments from taxpayers – many of them angry – who took issue with the fact that the implication was that taxpayer error was completely to blame. That, of course, wasn't true. There was clearly something else going on. IRS, for its part, stuck to its guns. H&R Block remained quite silent, posting occasional updates on its Facebook page but otherwise not offering additional information or an explanation.

Complaints about delays and processing problems, however, weren’t restricted to H&R Block. Taxpayers who filed using TurboTax, TaxWise and other software packages reported delays and errors. Individuals who filed in tax preparer offices were also complaining about delays – including one taxpayer who filed at a VITA (volunteer income tax assistance) site run by volunteers. Tax professionals were alarmed at the number of taxpayers at their offices hoping to file a second return to speed refunds along.

The problem wasn't getting better, it was getting worse.

In some instances, the check boxes appeared to process as blank; in other cases, the check boxes were incorrectly checked “YES” when the taxpayer checked “NO.” Comments on social media complained that returns were being sent to IRS painting them as convicted drug felons, not only delaying refunds but putting other scholarships and educational awards at risk.

It’s been estimated that the errors have impacted over 600,000 tax returns, most of them prepared by H&R Block (or using H&R Block software). I’ve reached out to H&R Block for comment and they intend to issue a statement shortly.

In the meantime, taxpayers are desperate for answers. For now, most are in a “wait and see” pattern and delays of up to six weeks are expected. If you’ve been affected, or think you might be affected, here are a few tips:

• If you are concerned about your return, and you have not received any information that would indicate that there is a problem, contact your tax preparer.
• Don’t file an additional return. This will slow the processing of your return and delay your refund.
• Don’t amend your return if your preparer has indicated to you that the problem is being addressed. Again, this may slow the processing of your refund and cause additional confusion. However, if the problem is not related to a tax preparer or software program (meaning you prepared your own return and did not check the boxes), you may need to file an amended return.
• Remember that the time to process your return begins when it is accepted by IRS, not when you completed your return. The forms 8863 were not accepted until mid-February and not earlier. Sadly, some tax professionals have indicated to taxpayers that returns were being processed earlier (as early as mid-January) and this is not the case.
• If you are waiting for your return to be processed for FAFSA (Free Application for Federal Aid) purposes, you can manually enter your financial info on the website and update that information once the returns are processed.
• For more information about the status of your return, you can use the “Where’s My Refund?” tool.

Taxpayers are understandably angry about the delays. Many depend on refunds related to education credits to pay tuition and other expenses and delays in processing those FAFSAs can be problematic (I was a student once, too). It’s more aggravating since official information about the problem and timing have been limited and rumors are still flying fast and furious. I promise that I’ll pass along more information as it is made available.

Originally published on Forbes.com by Kelly Phillips Erb - 03/09/2013

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