AwardYear: 1996-1997 ChapterNumber: 2 ChapterTitle: Required Verification Items and Acceptable Documentation Section: Verifying AGI and U.S. Income Tax Paid PageNumber: Acceptable Documentation The most common way to verify AGI and U.S. Income Tax Paid is by using a copy of the signed U.S. income tax return.*5* Several IRS forms serve as acceptable alternative documentation, however, depending on the method of tax filing used. Acceptable documentation will be discussed throughout this section of the guide. Remember that whatever documentation you use must contain the required signatures or preparer's official stamp and must contain all data necessary for verification. If all necessary data are not present, the student must provide additional documentation, which will be described. Special Considerations LEGAL GUARDIANS. For federal student aid purposes, a legal guardian is a person whom a court appoints as the student's guardian (in a legal relationship that will continue after June 30, 1997) AND whom the court directs to provide financial support to the student. On the FAFSA, the income and assets of a dependent student's legal guardian should be reported in the parental sections. The income and assets of the guardian's spouse would not be reported unless the court directed that those resources be used to support the student. Remember, though, that even if the spouse's income is not reported, the spouse is still reported in the applicant's household size (see page 18). INCOME EXCLUSIONS. In the past, some income amounts (such as child support paid) were "backed out" of the tax return AGI when that amount was reported on the FAFSA; therefore, the tax return AGI and the FAFSA AGI did not always match. Certain amounts are still excluded from the EFC calculation but are now built into the FAFSA itself and reported as separate line items (see the chart to the right). Now, the figure reported on the FAFSA should always match the tax return AGI, unless the FAFSA figure has been adjusted from a joint return (because of divorce or separation). If the figures don't match, a correction may be needed, as discussed in Chapter Three. Income Exclusions for SFA Purposes (see Worksheet #3 in the FAFSA Instructions) - taxable portions of grants, scholarships, FWS earnings, and other need-based work earnings - educational benefits or a living allowance provided under the National and Community Service Trust Act of 1993* - child support paid by the student or spouse, or by the parents * The Act established the following three programs: Americorps, Americorps VISTA, and Americorps National Civilian Community Corps. NONFILERS. If any of the persons required to report information on the FAFSA was not required to file a tax return, an AGI figure would not be available. Such a person would instead report income earned from work, which includes any income reported on the W-2 forms of the student (and/or spouse, and/or parents) PLUS any other earnings from work not reported on those forms. (For student financial aid purposes, this income earned from work IS NOT CONSIDERED untaxed income.) A properly completed verification worksheet sufficiently documents income earned from work. No further documentation is required. However, in lieu of a verification worksheet, you should require from each nonfiler a signed statement certifying his or her nonfiler status and listing the sources and amounts of income. (You can also require copies of the W-2 forms.) If you question the claim that filing an income tax return was not required, you have conflicting information that must be resolved before you may disburse federal student aid to the student. (See the "Applications with Conflicting Information" section in Chapter One of this guide.) Tips for Verifying AGI and Income Tax Paid - Check the marital status against base year income. An individual not married in the base year, but married when he or she applied, must report the spouse's income. Similarly, a previously married applicant who is widowed, separated, or divorced at the time of application would not report the former spouse's income. - Check the amount of taxes paid against the amount withheld. Applicants often misreport the amount withheld as the amount paid, even though they later received a refund. Also, make sure the amount reported does not include any FICA, self- employment tax, or other taxes from the tax return. - Check the filing status on the return. Married applicants (or parents) who file separately often neglect to provide both returns. - Examine the applicant's income documentation. If you suspect alterations, request a statement from the IRS or the issuing employer. (If you believe a document was purposely altered to increase a student's eligibility for aid, contact the Inspector General, as discussed in Chapter Five.) - In the case of divorce, ask about living arrangements. Some couples claim to be divorced but are still living in the same household. In such cases, check with the state in which the couple resides; if the state considers the arrangement a common law marriage, both incomes should be reported on the application. If not, only the income of the applicant (or responsible parent) should be reported. Even if only one income is reported, both members of the couple could be counted in household size (see the household size discussion earlier in this chapter). FILING EXTENSIONS. If any of the persons required to report information on the FAFSA had not filed a tax return at the time of application, an estimated AGI would have been figured using Worksheet #1 on page 11 of the FAFSA instructions. At the time of verification, the necessary tax return(s) should have been filed and can be used for verification. If the return(s) has not been filed by then, other documentation is required as discussed later in this section. However, the student must eventually provide you with copies of the filed return(s). For more information, see page 29. NATIVE AMERICAN APPLICANTS. Native Americans should report income and assets received from the Per Capita Act or the Distribution of Judgment Funds Act ONLY if the amounts exceed $2,000 per individual payment (and then only the amount over $2,000 is reported). Further, income or assets received under the Alaska Native Claims Settlement Act, as well as income from the Maine Indian Claims Settlement Act, should not be reported on the FAFSA. FOREIGN TAX FILERS. Income earned in a foreign country and taxes paid on that income are treated the same as U.S. income and taxes paid on that income, as long as taxes on the foreign income were paid to the central government of that country. In such a case, information from the foreign tax return would be reported on the FAFSA. (If the income was not taxed by that country, it should be reported as untaxed income.) The value of the foreign income and taxes should be reported in U.S. dollars, using the exchange rate at the time of application). [[Use of Form 2555]] For U.S. tax purposes, often a portion of foreign income can be excluded on Form 2555. The figure reported on line 43 of Form 2555 (or on line 18 of Form 2555EZ) should be reported as "untaxed income" on the FAFSA. The final total for Form 2555 must not be reported as untaxed income because it contains other exclusions. Using the Tax Return You should check the tax returns of the applicant, of his or her spouse (if the applicant is married) and of the applicant's parents or legal guardian (if the applicant is dependent). Remember, those who were "eligible to file" a 1040EZ or1040A are eligible for the Simplified Need Test, even if they filed another tax form. Therefore, you may encounter students who filed a tax return other than the type they specified on the FAFSA. When verifying application information against a tax return, you may find the chart on the next page useful. The chart is provided as a reference only for the most commonly reported items; it is not an inclusive list of all the items you must check on a tax return. [[The chart summarizing "Line Items" on some common tax returns on page 25 is currently unavailable for viewing. Please reference your paper document for additional information.]] [[Form 1040 PC]] The 1040 PC is a relatively new way an applicant can file. The applicant prepares this return on a personal computer using an IRS- accepted print feature included in many tax pereparation software packages. The software calculates the taxes and prints the return in a three-column "answer sheet" format. The applicant mails the return to IRS. Note that verifying an applicant's data from a 1040PC is a slightly different process. The line items are numbered identically to those on a regular 1040, but the 1040PC does not contain EVERY line item; rather, this form SHOWS ONLY THE DATA THE TAX FILER SUPPLIED. That is, line items appear only if the applicant used them. For example, if you wanted to know if an applicant had "Taxable interest income," you would check the 1040PC to see if Item 8a appears on the form. If so, the appropriate dollar amount will be there; IF ITEM 8A IS NOT PRINTED, THE APPLICANT HAD NO TAXABLE INTEREST INCOME. [[IRS TeleFile Worksheet acceptable--equivalent to 1040EZ]] A recently developed IRS computer program, TeleFile (formerly called 1040TEL), allows an eligible filer to complete a TeleFile Worksheet, call an IRS number, enter the TeleFile Worksheet information over the telephone, and have a computer figure the taxes. The TeleFile Worksheet is considered a tax return equivalent to the 1040EZ and is therefore acceptable for verification, provided the applicant SIGNS THE BOTTOM OF THE WORKSHEET. As the TeleFile Worksheet is not mailed to the IRS, no signature line appears on this form; you may have the applicant sign in the space at the bottom of the form. THE WORKSHEET MUST ALSO CONTAIN THE APPLICANT'S SIX-DIGIT IRS CONFIRMATION NUMBER IN SECTION 2 I. [[Faxed or photocopied tax returns are acceptable]] For verification purposes, you may accept a facsimile or photocopy of the original signed return filed with the IRS. IF A FACSIMILE OR PHOTOCOPY WAS MADE OF AN UNSIGNED RETURN, THE FILER (OR AT LEAST ONE OF THE FILERS OF A JOINT RETURN) MUST SIGN THE COPY. In lieu of a photocopy or facsimile of the original return, you may accept a tax form that has been completed to duplicate the filed return; this duplicate must contain at least one filer's signature. NOTE: SIGNATURES MUST BE COLLECTED AT THE TIME OF VERIFICATION, DURING THE APPLICABLE AWARD YEAR. SIGNATURES MAY NOT BE COLLECTED AFTER THE VERIFICATION DEADLINE FOR THAT AWARD YEAR. [[Tax return can be signed (or stamped) by the preparer]] In lieu of a return the filer(s) has signed, you may also accept a paper return the tax preparer has signed or officially stamped. (Documentation from electronic returns must be signed by the filer, as explained on page 29.) In some cases, you can waive the requirement for spouse and/or parent information and signatures (see the "Exclusions from Verification" section in the previous chapter). Using a Joint Return to Figure Individual AGI and Taxes Paid For an applicant (or a dependent applicant's parent) who filed a joint return but, at the time of verification, has become widowed, divorced, or separated, you must use the joint return and determine the individual income and taxes paid. To do so, you should require a copy of all relevant IRS Form W-2s in addition to the joint return. (If a filer is self-employed, or a W-2 is otherwise unavailable, you may accept a signed statement from the filer that certifies the base year AGI and U.S. taxes paid.) Starting with the income figures from the individual's Form W-2, add the individual's income that you have extracted from the joint return. Any interest or business income earned on joint accounts or investments should be assessed at 50 percent. (The same procedure should be used to divide business or farm losses.) Also, if the AGI listed on the joint return was adjusted ("Adjustment to Income"), you should reduce the individual's AGI by the portion of the adjustment that applies solely to him or her. For example, if an adjustment was made for moving expenses (which applies to the couple jointly), only 50 percent of the adjustment amount can be applied against the individual's income. In this manner, an AGI figure can be calculated for the individual filer, using a joint return; a signed statement from the filer, certifying that the data from the joint return were accurately assessed, is sufficient documentation for this procedure. [[Using a joint return to figure individual taxes paid]] To figure taxes paid on the individual's AGI, use either of the following methods: TAX RATE SCHEDULE. This is the preferred method. Using the IRS Tax Rate Schedule for the appropriate year, calculate the amount of tax that would have been paid if a separate return had been filed. Use the deduction and number of exemptions the individual could have claimed if he or she had filed a separate return. (If itemized deductions were taken, count only the portion of those deductions that could have been claimed on a separate tax return.) For example, a couple's total income was $45,000, and they claimed three exemptions (themselves and one child). The husband earned $28,000; the wife earned $17,000. They have now divorced. The woman has custody of her child; her $17,000 earnings should be adjusted to reflect the standard "head of household" deduction ($5,750) and two exemptions totaling $5,000 ($2,500 each for herself and the child). The original $17,000 minus the $5,750 standard deduction and the $5,000 exemptions results in $6,250 in taxable income. Use the tax schedules to determine how much tax she would have paid on this amount, taking into account any applicable credits (see the original return for this data). PROPORTIONAL DISTRIBUTION. Determine what percentage of the joint AGI was attributable to the individual and then assess the joint tax paid by that same percentage. Using the example above, assume the income tax paid was $4,646. The woman's income percentage of the total is 17 divided by 45, or .378 , and her estimated tax paid would be $1,756 (.378 x $4,646). Using a Fiscal Year Return Instead of a Calendar Year Return [[The example on page 27 is currently unavailable for viewing. Please reference your paper document for additional information.]] If the applicant filed a tax return for a fiscal year rather than a calendar year, the applicant should report, on the FAFSA, the AGI and U.S. Income Tax Paid from the fiscal year tax return that includes the greater number of months in the base year. So, the student should submit the tax return for that fiscal year. Alternative Documentation--If a Tax Return is Not Available If copies of the necessary tax returns are not available, you may accept the following documents to verify the AGI (or income earned from work if AGI is not available) and U.S. Income Tax Paid. [[The chart summarizing "Alternative Documentation" on page 28 is currently unavailable for viewing. Please reference your paper document for additional information.]] [[Letter 1722 may not give enough information]] TAXES FILED, BUT APPLICANT DOESN'T HAVE A COPY-- IRS LETTER 1722 OR RTFTP.*6* If the filer doesn't have a copy of the tax return, you may accept a copy of IRS Letter 1722 signed by the appropriate IRS regional official (stamped signatures are acceptable). IRS Letter 1722 can be obtained at local IRS district offices (NOT at regional service centers). Note that this document may not provide as much information about the applicant's financial status as does the tax return. For this reason, you may need to request supplemental documentation to complete verification. [[RTFTP may be used in lieu of Letter 1722]] In some locales, IRS Letter 1722 is not available. In such cases, you may accept the RTFTP, which is a computerized summary of tax account information provided by IRS Regional Service Centers. The RTFTP is acceptable documentation for verification purposes, but the student (and at least one parent, if the student is dependent) must sign it to attest to its accuracy. (The only exception to this signature requirement is if the student authorizes, through Form 4506, that the RTFTP be sent directly to the school. An RTFTP sent directly from the IRS to the school need not be signed to be valid.) TAXES FILED ELECTRONICALLY--COPY OF ELECTRONIC RETURN. When an electronic tax return is filed, the filer also submits IRS Form 8453, WHICH IS NOT SUITABLE FOR PERFORMING VERIFICATION. However, you may accept electronic tax return documents that contain all information normally provided on the IRS tax return, as long as the filer has signed those documents. TAXES FILED ELECTRONICALLY, BUT APPLICANT HAS NO COPY OR ELECTRONIC DOCUMENTS NOT SUFFICIENT--IRS LETTER 1722 OR RTFTP.*7* If the filer has no copy of the electronic tax return documents, or they do not contain all information normally provided on the IRS tax return, you may accept a copy of IRS Letter 1722 or an RTFTP in lieu of the actual return. TAXES NOT YET FILED, FILING EXTENSION GRANTED-- W-2S OR STATEMENT OF INCOME, AND PROOF OF EXTENSION. If a tax return has not yet been filed and a filing extension was granted, you may accept the following alternative documentation: - copies of the relevant IRS Form W-2, AND - one of the following items as proof that the IRS has granted a filing extension: - a copy of IRS Form 4868, "Application for Automatic Extension of Time to File U.S. Individual Income Tax Return" (automatically grants the taxpayer a four-month extension beyond the April 15 deadline) - a copy of the IRS approval of an extension beyond the automatic four-month extension In addition to supplying the above documentation, the applicant must submit a copy of the tax return(s) when filed. When you receive the completed tax return(s), you may use it to reverify the required data. AN APPLICANT WHO FAILS TO SUBMIT A COPY OF THE FILED TAX RETURN(S) OR ALTERNATIVE DOCUMENT(S) BEFORE THE DOCUMENTATION DEADLINES IS INELIGIBLE TO RECEIVE FEDERAL STUDENT AID AND IS REQUIRED TO REPAY ANY AID DISBURSED. Regardless of whether the applicant repays the aid, the school is liable for the interim disbursement, as explained on page 33. |