AwardYear: 1995-1996 ChapterNumber: 2 ChapterTitle: Required Verification Items And Acceptable Documentation Section: Verifying AGI and U.S. Income Tax Paid PageNumber: The AGI and U.S. Income Tax Paid can be verified with a copy of the signed U.S. income tax return. You should check the tax returns of the applicant, of his or her spouse (if the applicant is married) and, for dependent applicants, of the applicant's parents or legal guardian. Remember, those who were "eligible to file" a 1040EZ or 1040A 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. Special Considerations LEGAL GUARDIANS. For federal student aid purposes, a legal guardian is a person who is court-appointed to be the student's legal guardian (in a legal relationship that will continue after June 30, 1996) AND who is directed by a court to support the student with his or her own financial resources. 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 appointment directed that those resources be used to support the student.) INCOME EXCLUSIONS. In the past, some exclusion amounts (such as child support paid) were "backed out" of the tax return AGI when reported on the FAFSA so that the tax return AGI and the FAFSA AGI did not always match. These amounts are still excluded from the EFC calculation, but now they are built into the FAFSA itself and reported as a separate line item (see the chart to the left). These amounts do not affect your verification of the AGI; the figure reported on the FAFSA should always match the AGI reported on the tax return, unless it's been adjusted from a joint return (because of divorce or separation). If it doesn't match, a correction may be required, as discussed in the next chapter. **[The "Income Exclusions for SFA Purposes" chart on page 21 is currently unavailable for viewing. Please reference your paper document for additional information.]** NONFILERS. If any of the persons required to report information on the FAFSA were not required to file a tax return, an AGI figure would not be available. These persons 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 related W-2 forms.) If you question the claim that income tax filing was not required, this constitutes 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. Individuals who were not married in the base year, but were married when they applied, must report spouses income. Similarly, a previously married applicant who is widowed, separated, or divorced at the time of application would not report the former spouses 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 IRS Form W-2s. If you suspect alterations, request a statement from the IRS or the issuing employer. (If you believe a document was purposefully altered to increase a students eligibility for aid, contact the Inspector General, as discussed in Chapter Six.) - In the case of divorce, ask about living arrangements. Some couples who claim to be divorced are still living in the same household. In such cases, check with the state in which the couple resides; if the state considered the living arrangement to be 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. Regardless of how income is reported, household size should be reported as discussed 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 p. 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 the filed return(s). For more information, see p. 28. 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. PUERTO RICAN AND FOREIGN TAX FILERS. Information from a Puerto Rican tax return would be reported on the FAFSA in the same manner as U.S. tax information. These amounts are already reported in U.S. dollars, and must be compared to the U.S. tax return line items in order to be verified. Income earned in a foreign country is treated the same as U.S. income if taxes 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). Using the Tax Return When verifying application information against a tax return, you may find the chart on the following page useful. This 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. For verification purposes, you may accept a facsimile or photocopy of the original signed return that was 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. If the applicant or the applicant's parent(s) filed a 1040TEL, you may accept a copy of the 1040TEL return only if it is accompanied by a telefile printout. The 1040TEL and the printout should be consistent. In lieu of a photocopy of the original return that was filed with the IRS, you may accept a tax form that has been completed to duplicate the filed return; this duplicate must contain the at least one filer's signature. NOTE: SIGNATURES MUST BE COLLECTED AT THE TIME OF VERIFICATION, DURING THE APPLICABLE AWARD YEAR. In lieu of a return signed by the filer(s), you may also accept a paper return signed (or officially stamped) by the tax preparer. (Documentation from electronic returns must be signed by the filer, as explained on p. 27.) 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). **[The "Line Items" chart on page 24 is currently unavailable for viewing. Please reference your paper document for additional information.]** 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 is now widowed, divorced, or separated, you must use the joint return and factor out the individual income and taxes paid. To do so, you should require a copy of all relevant IRS Form W-2's 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 which certifies the base year AGI and U.S. taxes paid.) Starting with the income figures from the individual's Form W-2, add in any income that represents the individual's personal income on the joint return. Any interest or business income earned on joint accounts or investments should be assessed at 50 percent. (The same procedures 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. 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, you should 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 and the wife earned $17,000. They have since divorced. The woman has custody of her child; her $17,000 earnings should be adjusted to reflect the standard "head of household" deduction ($5,450) and two exemptions totaling $4,700 ($2,350 each for herself and the child). The original $17,000 minus the $5,450 standard deduction and the $4,700 exemptions results in $6,850 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 $4,759. The woman's income percentage of the total is 17 divided by 45, or .378 , and her estimated tax paid would be $1,799 (.378 x $4,759). Using a Fiscal Year Return Instead of a Calendar Year Return If the applicant filed a tax return for a fiscal year rather than a calendar year, the applicant should report 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. **[The graphic "For Example" on page 26 is currently unavailable for viewing. Please reference your paper document for additional information.]** 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 "Alternative Documentation" chart on page 26 is currently unavailable for viewing. Please reference your paper document for additional information.]** TAXES FILED, BUT APPLICANT DOESN'T HAVE A COPY-- IRS LETTER 1722 OR RTFTP.*7* 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). This document may not provide as much information concerning the applicant's financial status as does the tax return. For this reason, the school may need to request supplemental documentation in order to complete verification. IRS Letter 1722 can be obtained at local IRS district offices (NOT at regional service centers). In some locales, the 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 signs and submits IRS Form 8453, WHICH IS NOT SUITABLE FOR PERFORMING VERIFICATION. However, you may accept electronic tax return documents that contain all the information normally provided on the IRS tax return, if those documents contain the filer's signature. TAXES FILED ELECTRONICALLY, BUT APPLICANT DOESN'T HAVE A COPY--IRS LETTER 1722 OR RTFTP.*7* If the applicant's electronic tax return documents do not contain all the information normally provided on the IRS tax return, you may accept a copy of IRS Letter 1722 or RTFTP in lieu of the actual return, as described above. TAXES NOT YET FILED, FILING EXTENSION GRANTED-- W-2'S 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 a filing extension has been granted by the IRS »a copy of IRS Form 4868, "Application for Automatic Extension of Time to File U.S. Individual Income Tax Return" (which 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. IF THE APPLICANT FAILS TO SUBMIT A COPY OF THE FILED TAX RETURN(S) BEFORE THE DOCUMENTATION DEADLINES, THE APPLICANT IS INELIGIBLE TO RECEIVE FEDERAL STUDENT AID AND IS REQUIRED TO REPAY ANY AID DISBURSED. Regardless of whether the student repays the money disbursed, the school is liable for the interim disbursement, as explained on p. 33. |