|AwardYear: 1998 - 1998|
ChapterTitle: Required Verification Items And Acceptable Documentation
Section: Verifying AGI and U.S. Income Tax Paid
Most often you can verify AGI and U.S. Income Tax Paid by using a copy of the signed U.S. income tax return.4 U.S. tax filers can file their taxes electronically (through e-file), over the telephone (through TeleFile), or using traditional paper tax forms. As explained later in this section, the tax documents needed for verification may vary depending on the filing method used by the applicant, spouse, and/or parents. All documentation must contain the required signatures (or stamp or other official validations) 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.
To verify AGI and taxes paid, you must first identify all the persons whose financial data was reported on the FAFSA, and which tax returns, if any, they filed. You must check the tax returns for all persons whose financial data was reported on the FAFSA: the applicant, the applicants spouse (if the applicant is married), or the applicants parents or legal guardian (if the applicant is a dependent student). In Section E of the FAFSA, each of these individuals had to indicate which tax return they filed or that they were not required to file a tax return at all. During the verification process, you may encounter individuals who filed a 1040, even though they indicated on the FAFSA that they filed a 1040EZ or 1040A. (For the purpose of the Simplified Needs Analysis, the FAFSA instructs individuals who were eligible to file a 1040EZ or 1040A to indicate that they did file such a return, even if they really filed a 1040.)
The AGI figures reported on the FAFSA should always match the AGI figures that appear on the applicants tax return, unless the FAFSA amount has been adjusted from a joint return due to divorce, separation, or professional judgment. If the figures dont match, a correction may be needed, as discussed in Chapter 3 of this guide. For more information on how specific types and special categories of income should be reported on the FAFSA, see the 1998-99 Counselors Handbook for Postsecondary Schools.
When verifying application information against tax returns, you may find the following chart 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.
For verification purposes, you may accept a copy (such as a photocopy, fax, or digital 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 filers 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.
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 in the following section.) 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).
Special Tax Considerations
1040PC. This feature, built into many commercial tax preparation software programs, allows an individual to use a PC to enter his or her individual income and tax information. The software calculates the taxes and prints a return in a three-column answer sheet format. The applicant mails or electronically files the return. The 1040PC return is acceptable documentation for verification purposes, as long as it is signed by at least one of the tax filer(s). However, the 1040PC return does not contain every line item; rather, it shows only the data the tax filer provided. For example, if Item 8a, Taxable interest income, does not appear on the 1040PC return, that means the applicant had no taxable interest income. (Note that when an electronic tax return is filed, the filer also submits IRS Form 8453. Form 8453 is not suitable for performing verification.)
TeleFile. TeleFile (formerly called 1040TEL) allows 1040EZ filers to file a tax return over the phone. Filers complete a TeleFile Tax Record, call an IRS number, and enter the information over the telephone. The TeleFile Tax Record is acceptable documentation for verification purposes, provided it contains the filers six-digit IRS confirmation number in Line M and is signed by the filer.(There is no signature line; have the filer sign at the bottom.)
Nonfilers. An AGI figure will not be available for individuals who are not required to file a tax return. Such a person would instead report on the FAFSA income earned from work, which includes any income reported on the individuals forms W-2 plus any other earnings from work not reported on those forms. (Even if no taxes were paid on this income earned from work, it should not be reported as untaxed income on the FAFSA.)
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 accept copies of the forms W-2.)
ED does not require financial aid professionals to have special knowledge or expertise regarding the U.S. tax code. If a person whose data was required on the FAFSA submits to you a signed statement claiming non-tax filer status, and you have reason to believe that person would have been required to file a U.S. tax return, this constitutes conflicting information and must be resolved. (For more information on conflicting information, see Chapter 1 of this guide.) For example, in such a case, you might require a letter from the IRS, a copy of the applicable tax provision, or other documentation supporting the individuals claim to non-filer status. Remember, conflicting information must be resolved before you can disburse federal student aid.
Filing Extensions. If any of the persons required to report information on the FAFSA will file but had not filed a tax return at the time of application, they should have used Worksheet #1 in the FAFSA instructions to calculate an estimated AGI. 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 and a filing extension was granted by the IRS, you may accept the following alternative documentation:
copies of the relevant forms W-2, and
one of the following items as proof that the IRS has granted a filing extension:
»a copy of IRS Form 4868Application 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), or
»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 re-verify 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.
Fiscal Year Returns. For a fiscal year tax return (as opposed to a return for the 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. Accordingly, you should use the tax return from that fiscal year for verification purposes.
Nonresident Filers. 1040NR is a special return filed by certain nonresidents, mostly individuals holding temporary visas (such as an F-1 or H-1). Such persons are neither permanent residents nor U.S. citizens. The 1040NR is acceptable documentation for verification purposes.
Foreign Income. If a U.S. tax filer earns foreign income, a portion of that income can be excluded from taxable income. The excluded portion should be reported as untaxed income on the FAFSA, while the remainder is part of the AGI. (The amount of foreign income that was excluded should be verified using IRS Form 2555 or 2555EZ.)
If the applicant (or the applicants parents) earned foreign income and paid taxes to a central foreign government, the income and taxes paid should be treated the same as U.S. income and taxes paid. Information from the foreign tax return would be reported on the FAFSA and for verification purposes, the foreign return would be considered equivalent to an IRS Form 1040.
If the applicant (or the applicants parents) earned foreign income but did not pay any taxes on that income, it should be reported as untaxed income.
In all cases involving foreign 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.
Alternative DocumentationIf a Tax Return is Not Available
If copies of the necessary tax returns are not available, documents such as the following are acceptable for verification purposes, regardless of whether the tax return was filed electronically or on paper.
IRS Letter 1722.5You 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). This document may not provide as much information about the applicants financial status as does the tax return. For this reason, you may need to request supplemental documentation to complete verification.
RTFTP.5 In locales where IRS Letter 1722 is not available, you may accept the RTFTP, which is a computerized summary of tax return information provided by IRS Regional Service Centers. The RTFTP must be signed by the student (and at least one parent, if the student is dependent), unless it was sent directly from the IRS to the school (as requested by the student, using Form 4506).
Using a Joint Return to Figure Individual AGI and Taxes Paid
If the filer of a joint return has become widowed, divorced, or separated since filing the return, it may be necessary for verification purposes to determine the individuals income and taxes paid, using the joint return and the relevant IRS Forms W-2. (If a filer is self-employed or if a W-2 is not available, 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 individuals forms W-2, add the individuals 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 individuals 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 individuals 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.
Use one of the following methods to figure the individuals taxes paid:
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 couples 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 the 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). For instance, at the $45,000 income level, this woman and her husband would not have qualified for earned income credit (EIC). However, without her husbands income, she does qualify for EIC, and you should factor that into the calculation.
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 womans 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 womans name (such as a trust fund), you should count these assets. You should also factor in the womans EIC using the same ratios. (The proportional calculation applies to all taxable items.)