Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

Verifying AGI and U.S. Income Tax Paid

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.

Last Modified: 06/09/1998