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Reviewing Tax Returns for Verification Purposes

Reviewing Tax Returns for Verification Purposes. David Gelinas Senior Associate Dean & Director of Financial Aid Davidson College. What do we do?. Perform 100% verification Require ALL pages of personal tax return Require all W-2s and 1099s

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Reviewing Tax Returns for Verification Purposes

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  1. Reviewing Tax Returns for Verification Purposes David Gelinas Senior Associate Dean & Director of Financial Aid Davidson College

  2. What do we do? • Perform 100% verification • Require ALL pages of personal tax return • Require all W-2s and 1099s • Require student tax return and W-2s/1099s (all pages) • Optionally request business tax returns and Schedule K-1s

  3. Why do we do this? • Early filing deadline • Heavy use of estimated data by filers • Variation between PROFILE and FAFSA data • #1 source of assistance: Institutional funds • Stewardship responsibility to school, federal funding sources and state funding sources

  4. What are we looking for? • Inconsistencies between application (PROFILE and/or FAFSA) data and tax return data • Clues to questions we may need to ask • Clues to other documents we might need to see

  5. What are we looking at? • References are to 2008 Form 1040 • Greatest number of opportunities for tax filer to adjust income • Greatest likelihood to find errors • Greatest number of extra items reportable on PROFILE

  6. Starting with the basics • Is this the tax return from the correct income year? • Does it reflect the correct filing status? • The ever-popular Head of Household issue • If Married Filing Separately, did we get both returns? • Are the exemptions consistent with the reported family size? • Don’t have to match, though • One looks back (exemptions); the other looks forward (household size)

  7. Looking at the line items • Line 7 (Wages, salaries, tips, etc.) • Is this amount consistent with reported earnings on PROFILE/FAFSA? • Does this match what’s on Forms W-2? • Lines 8a (Taxable interest), 8b (Tax-exempt interest) and 9a (Ordinary dividends) • Are these amounts consistent with what’s reported on PROFILE/FAFSA? • Is Schedule B required?

  8. Looking at the line items (cont.) • Line 12 (Business income or (loss)) • Is there a business asset reported on the PROFILE/FAFSA? Should there be? • Line 13 (Capital gain or (loss)) and Line 14 (Other gains or (losses)) • Are there potentially-reportable assets?

  9. Looking at the line items (cont.) • Line 15 (IRA distributions) and Line 16 (Pensions and annuities) • Were distributions (taxed and untaxed portions) properly reported? • Was there a rollover? • Was this an exceptional circumstance? PJ? • Line 17 (Rental real estate, etc.) • Does this refer to a reportable asset? • How do you treat losses if you use IM?

  10. Looking at the line items (cont.) • Line 18 (Farm income or (loss)) • Is this a reportable asset (FAFSA issue)? • Line 20 (Social security benefits) • Were taxed and untaxed portions properly reported? • Were dependent benefits properly reported? • Line 21 (Other income) • Anything of interest here?

  11. Adjusted Gross Income • Lines 23 through 35 • Some adjustments used for both FM and IM; some for IM only • Line 28 (Self-employed SEP, SIMPLE and qualified plans) and Line 32 (IRA deduction) • Were these correctly reported on PROFILE/FAFSA?

  12. Credits and Income Tax Paid • Line 50 (Education credits) • Were these properly reported? • Is there Form 8863 to support these credits? • Line 56 (Subtract line 55 from line 46) • THIS line is “income tax for 2008” • NOT Line 61 (total tax) • Line 57 (Self-employment tax) is (somewhat) accounted for in the EFC formula

  13. Payments • Line 64a (Earned income credit) • Line 64b (Nontaxable combat pay election) • Line 66 (Additional child tax credit) • Line 70 (Recovery rebate credit) • NONE of these are reportable as untaxed income

  14. Accompanying Schedules • Schedule A (Itemized Deductions) • Line 1 (medical/dental expenses) • Are excess expenses being itemized? • Grounds for PJ treatment in FM? • Accounted for under IM • Lines 10 and 11 (mortgage interest) • For IM purposes: • In line with reported home value/debt? • Does AGI show ability to support this expense?

  15. Accompanying Schedules (cont.) • Schedule C (Profit or Loss from Business (Sole Proprietorship)) • Line 31 will appear as income on Form 1040, Line 12 • Is the business being run out of the home? (Line 30) • Add this deduction as untaxed income for IM? • Should there be a business value reported on the FAFSA?

  16. Accompanying Schedules (cont.) • Other Schedule C questions: • What to do with car/truck expenses? (Line 9) • Look at Part IV, Information on Your Vehicle • Treatment of depreciation? (Line 13) • Treatment of travel, meals and entertainment? (Line 24) • Anything of interest in Part V, Other Expenses?

  17. Accompanying Schedules (cont.) • Schedule D (Capital Gains and Losses) • Appears on Form 1040, Line 13 • Lines 3 and 10 represent proceeds from sales • Line 3: short-term (bought and sold in same calendar year) • Line 10: long-term (bought in prior calendar year; sold in this one) • Even if Line 10 shows a loss, does it represent a form of income (IM only) in the current calendar year? • Your thoughts?

  18. Accompanying Schedules (cont.) • Schedule E (Supplemental Income and Loss) • Appears on Form 1040, Line 17 • Page 1 covers rental property and royalties • Income received is reported on lines 3 and 4 • Expenses are reported on lines 5 through 18 • Depreciation is reported on line 20 • Add back in under IM?

  19. Accompanying Schedules (cont.) • Schedule E (cont.) • Page 2 covers Partnerships, S Corporations, Estates and Trusts, and REMICs • Partnerships/S Corporations are listed on lines 28A through 28D • Questions under IM: • Is this the family’s primary source of income? • If not, how do you treat it? • Allow losses? Add back in as untaxed income?

  20. More on Schedule E • To dig even deeper, you can request the following: • Form 1065 for Partnerships • Form 1120-S for S Corporations • Schedule K-1 for each shareholder • Shows the shareholder’s specific share of the income

  21. Accompanying Schedules (cont.) • Schedule F (Profit or Loss from Farming) • Appears on Form 1040, Line 18 • Depreciation is reported on Schedule F, Line 16 • Add back in under IM? • Questions under IM: • Is this the family’s primary source of income? • If not, how do you treat it? • Allow losses? Add back in as untaxed income?

  22. In Conclusion • Where you stand on this level of verification depends on the seat you’re sitting in • Mostly (or entirely) state and federal aid? NAH! • High volume of applications? PROBABLY NOT • Heavily institutional aid? ABSOLUTELY!

  23. Credit where credit’s due • To Kalynn Wilczynski, formerly of Emory University • To my many colleagues over the years who keep asking for this presentation • To my applicant families for providing a never-ending stream of raw material

  24. Thank you for coming today!

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