IRS is Wrong

Today TaxMama hears from Bret in the Tax Quips Forum, with an IRS rejection letter. To make a long story short – “IRS rejected his Lifetime Learning Credit  for 2009 because the Form 1098-T showed –0- in box 1. And because his employer paid the expense – even though he paid taxes on the education expense reimbursement. Should Bret keep fighting? Or is IRS correct?”


Dear Bret,

I don’t believe you are wrong. You paid tax on the money. Therefore you have a basis in the amount paid. Continue to argue this.

Use your year-to-date pay stub or W-2 that shows the education expenses were added to your wages. Your argument is – if your employer had actually paid the expenses as a tax-free employee benefit, you understand that you would not be entitled to claim the credit.

Quote from IRS Publication 970 You cannot use any of the tax-free education expenses paid for by your employer as the basis for any other deduction or credit, including the American opportunity credit and lifetime learning credit.

However, this was not a tax-free benefit. These expenses were paid from your wages. You paid tax on this income – your company essentially wrote the check on your behalf. Therefore since it was money from your own wages that paid the education costs, you are entitled to the tax credit.

And the fact that the 1098-T does not show that you paid the expenses is irrelevant. The colleges are notorious for making errors on their 1098-Ts. You cannot be held responsible for the university’s errors.  The NY State Society CPA Journal reported on this problem in 2005. Nothing has improved.  

Stand by. You may get additional tips from other tax pros here in the TaxQuips Forum.

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