529 Distribution - Uh oh - letter from IRS...

Paying for College
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<p>I recently received a letter from the IRS questioning our 529 distributions for tax year 2010. The form 1099-Q from the 529 plan figures show a gross distribution of $17,400 (box 1), with earnings of $9,085.20 (box 2), leaving a basis of $8,314.80.</p>

<p>The IRS wants to include the entire earnings portion ($9,085.20) as income.....thus an additional tax bill of $3,598 ($3,490 + $108 penalty). I guess the IRS was unable to access the information that the college reported on the form 1098-T.....no way they should be claiming the entire earnings amount is taxable. The 1098-T shows $21,940 in qualified tuition/expenses (box 2), and scholarships of $15,271.16 (box 5).</p>

<p>Based on my figures, I should have been fine. However two things happened to mess up my best laid plans! First, the 529 plan screwed up my distributions. I requested my 2009 tax year distribution ($13K) in mid-Dec of that year. When I finally received the check though, it was dated 1/2/2010. With my planned 2010 distribution of $4,400 that I took in Aug, 2010, technically I ended up with a 1099-Q totaling $17,400.....that's problem #1.</p>

<p>Problem #2 is that the college reported 3 semesters of scholarships (an additional $3,170 from what I had planned) on the 1098-T, which I had not anticipated. They told me the scholarship money (by law) is distributed 10 days prior to the beginning of the semester....unfortunately in 2010 this meant an additional semester of scholarship $$ for the 1098-T dated 1/1/2010.</p>

<p>Sorry for dragging this out and having such a long confusing post.....thanks if you are still with me. So even though I painstakingly planned all this out and documented all the expenses, I still find myself with this issue. Technically, based on the hard calendar dates, I over withdrew $3,649.16 (approx $1905 of taxable earnings). </p>

<p>I'd like to hear from anyone else who has had to document their 529 distributions for the IRS.....how did you handle things? My plan is to send the IRS my 529 calculations for all 5 years my son was in school (2008-2012), to show how things flowed throughout.</p>

<p>If they don't agree, I guess I am going to have to cough up some back taxes. How about book expenses? Has anyone ever tried to use the school's COA figures for books instead of the actual out of pocket costs? The school's COA book figures for 2010 were $1460, but my son only spent half that. I could save some $$ if I used the COA figures...</p>

<p>Thanks in advance if you can send any advice my way!!</p>

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<p>I had to send an explanation to the IRS last year. I did not have exactly the same issues as you (the december request resulting in a january check) but there was a mismatch between the 1098s and the 529 withdrawals resulting in a letter from the IRS. The 1098s only showed tuition paid and not room and board because kid was off campus, so it looked as if we had withdrawn too much. Also, the tax forms are calendar years and the college costs are academic years so I had to write out some explanations. I just wrote a letter with numbers from the college website.</p>

<p>I used the colleges estimated costs of attendance for room and board in my explanation rather than actual expenses (we had rent documentation but not so much with food, so I just used the college COA as being simpler) and it was all accepted and fine.</p>

<p>For one kid I had miscalculated the impact of the tax credit we took, so I did end up owing something like $35, not the several hundred that the IRS originally asked for!</p>

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<p>

Could you get the 1099-Q corrected?</p>

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<p>If the money was distributed in 2010, then the 1099-Q is correct, so there is nothing to be corrected. This serves as a warning to others going forward - ask for that distribution early enough to have it sent for the current year. Also, if they delay sending it, take that into consideration for the following year. Also keep an eye on when schools are applying credit to your account for scholarships. With some care, this situation should have been avoidable.</p>

<p>It looks like you have about $7,000 of eligible tuition expenses after scholarships - then you need to reduce this by another $4000 if you’re claiming education credits. That leaves $3000 of eligible tuition expenses, plus any expenses that were not reported as tuition (room and board, books, etc). If you can document them, you can use the school’s COA numbers, as many people don’t keep receipts for actual expenses for books, though they should. It looks like you shouldn’t owe what the IRS is asking for, but I suspect it will be more than you are expecting.</p>

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<p>Update: I sent back our IRS inquiry letter.</p>

<p>The good news is I don’t think we will have to pay another dime for 2010. As I delved into the details of all this, I discovered that all the fees for the Summer Session classes that my son took (8 credits - China Business courses…6 weeks in China) had not been included in our previous calculations/planning.</p>

<p>The school only included the cost of the tuition ($3800) on the 1098-T. The COA figures that the school provided for that session totaled over $10,500. After some digging and many phone calls to the school, we were able to determine that the travel costs (airfare/ground transporation) included in that amount were approx $2800. So we were able to include eligible education expenses of over $3,900 (room/board, program fee, books/materials)…enough to cover all of our 529 distributions (and also allow $4K for the Opp Credit).</p>

<p>So no additional taxes…</p>

<p>CTScoutMom…you’re correct. It is VERY important for parents to be on top of all the dates. Call the school well in advance…call the 529 plan…make sure there are no surprises!</p>

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This is an old thread, but today I got a CP2501 notice from the IRS (“your tax return doesn’t match the information we have on file”) about my 2013 return. If I hadn’t responded they would have adjusted my return to have me pay tax on the earnings reported on the 1099-Q for my 529 distribution. The 1098-T filed by the school shows the “amounts billed for qualified tuition and related expenses” and this does not include room & board (even for kids who do live on campus contrary to what another commenter implied). Room & board doesn’t qualify for American Opportunity or Lifetime Learning credits. Room & board is a qualified educational expense for the purpose of non-taxable 529 distributions.

I’ve paid college bills with e-checks and get distributions from the 529 electronically so I can pay the spring semester bill in December without running in to the issue of transactions being delayed to the next year, as with the OP.

I called the IRS and I told the the agent that I spent more than the amount of the gross distribution from the 529 on qualified expenses (this amount was more than the 1098-T box 2 amount) and he was able to note in the case “taxpayer states that …” and close the case. I’m not sure with tax prep software and e-filing how to avoid this going forward but the agent said just keep your records because they can ask for documentation for up to 3 years.

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This is an old thread and a new thread should have been started. But I don’t think it has anything to do with tax prep software or e-filing. Nothing is reported on a tax return regarding 529 distributions that are less than 529 QEE no matter how a return is prepared or filed. As the agent said, you just keep your source records(bills, online account statements, cancelled checks or other records of payment). For 529 distributions that includes R&B expenses. There have been other posts here on CC in the past where letters of inquiry regarding this have been relatively easy to deal with as long as there is documentation.

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As noted above, you should start a new thread. Old threads should be used for research only, and should not be resurrected. Closing.