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: 1997-1998
ChapterNumber: 2
ChapterTitle: Required Verification Items And Acceptable Documentation
Section: Verifying AGI And U.S. Income Tax Paid
PageNumber:


Most often you can verify AGI and U.S. Income Tax Paid 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. 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, as described in this section.


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,
1998) 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 included 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 or because of a professional judgment). 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
must 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 or separation, ask about living
arrangements. Some couples claim to be divorced or separated
but still live in the same household. In such cases, check with
the state where the couple resides; if the state considers the
arrangement a common law marriage, both incomes should be
reported on the application. If not, only 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).

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 or by
the United States, 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

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 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.

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 "Line Items"chart on page 25 is currently unavailable
for viewing. Please reference you paper document additional
information.]]

[[Form 1040 PC]]
The 1040PC 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 preparation 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 the TeleFile Worksheet 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 LINE M.

[[1040NR for non-residents]]
Nonresident applicants now may submit the 1040NR for verification
purposes. Such persons are neither permanent residents nor U.S.
citizens. This form, published by the IRS, is filed mostly by those
holding temporary visas (such as an F-1 or H-1).


Acceptable Copies

[[Copy of tax return is acceptable]]
For verification purposes, you may accept a copy (such as a
photocopy, telefax, or scanned image) of the original signed return
filed with the IRS. IF A FAX, PHOTOCOPY, OR OTHER
ACCEPTABLE COPY 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 copy 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 if 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.)

[[Using a joint return to figure individual taxes paid]]
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. 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
method.

To figure taxes paid on the individual's AGI, use either of the
following methods:

TAX RATE SCHEDULE (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 ($5,900) and two exemptions totaling
$5,100 ($2,550 each for herself and the child). The original
$17,000 minus the $5,900 standard deduction and the $5,100
exemptions results in $6,000 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). This method requires the FAA to
include only the amount of earned income credit (EIC) that the
woman could have claimed as if she were a single filer.

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). If there
were assets that were 100 percent in the woman's name (such as a
trust fund), the FAA would count 100 percent of these assets. The
FAA would treat the woman's EIC using the same ratios. (The
proportional calculation applies to all taxable items.)


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, 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.

[[The graphic "For Example"on page 28 is currently unavailable
for viewing.Please reference your paper document for
additional information.]]


Alternative Documentation--If a Tax Return is Not Available

If copies of the necessary tax returns are not available, you may
accept the documents listed here to verify the AGI (or income
earned from work if AGI is not available) and U.S. Income Tax Paid.

Alternative Documentation
(in lieu of a tax return)
- Taxes Filed, Applicant Doesn't Have a Copy--
--IRS Letter 1722 or RTFTP
- Taxes Filed Electronically, Applicant Doesn't Have a Copy--
--IRS Letter 1722 or RTFTP
- Taxes Not Yet Filed, Extension Granted--
--W-2 or Signed Statement, and proof of extension
- Taxes Not Filed, Filing Not Required--
--Signed Statement of Nonfiler Status and Income

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 may 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. If the line item
for taxes paid does not show up on Letter 1722, no taxes were paid.

[[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 must use the tax return(s) 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 (see page 33).

Last Modified: 07/28/1998