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: 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 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 IRS Form W-2’s. 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 student’s 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.