<p>D got an IRS letter yesterday for underpayment of taxes in 2010, to the tune of over $7000 with penalties. Glad I was sitting, and after about an hour found the problem, we had a 529 form from a college fund that showed a profit of $251.29, on $2000 payed out for college. The brains (or a machine) at IRS read it as $25,129 profit, clearly more than our 1098T shows paid. It's funny now, I hope, pretty hard to see how she can profit $25,000 on a $2000 payout, but it made me wonder if other people have had serious (or humorous) issues with IRS misinterpreting tax info from these forms?</p>
<p>I think it would be from misreading the 1099 from the 529 fund rather than the 1098T as the 1098t wouldn’t contain any such info.</p>
<p>$7,000 plus penalties, I’d have had a stroke! I wish you lots of luck sorting it out. We had a very frustrating time about 4 years ago sorting out an IRS error that had them saying my freshman college daughter owed thousands of dollars plus interest and penalties (completely their error). They are soooo hard to deal with. We would send letters and never get any response - any business that operated that way would soon be out of business. It took about 6 months and we would continually get the letter increasing penalties and interest and never any acknowledgement of the letters we were sending, then one day they suddenly sent her a check for a refund of around $11 and some interest. Never did get an explanation about where they got their ridiculous figures from. At 5 months we had actually got to the stage of contacting an IRS taxpayer advocate for help. She had said to give it one more month as 6 months was fairly normal for the IRS, and then to contact he again. She was spot on. Good luck!!!</p>
<p>Thanks for the encouraging discouragement. Friend just got similar letter from IRS on taxes and penalties from a 529. Now she needs to find paperwork, pay accountant who did taxes to deal with it. Is the IRS seriously concerned with tax fraud through 529’s so they are focusing on them. Seems like small potatoes to me.</p>
<p>In my job I see the “trends” for audit letters, and this year we saw a big increase in education (especially 529 plans) and the other was seeking verification for brokerage transactions. Luckily it is fairly easy to show through financial statements and bursar statements the amount required for the school and the amount paid. What really hurts is that 1098-T docs are often incorrect and the amounts don’t necessarily correspond with the tax year.</p>
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Lol. You’re welcome.</p>
<p>Though better to be prepared. If I had known up front that the total lack of communication and taking about 6 months was quite normal, I might have been a lot less stressed out by the whole experience. If you do have problems sorting it out, turn to your local IRS tax advocate. </p>
<p>Agree, the 529 accounts do seem like small potatoes. It all seems a bit random who they decide to challenge on the 529 accounts. We have had a few posters have to prove they used their 529 funds for legit expenses, and many that have not.</p>