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 Require student tax return and W-2s/1099s (all pages) Optionally request business tax returns and Schedule K-1s

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

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

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

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)

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?

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?

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?

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?

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?

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

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

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?

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?

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?

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?

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?

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?

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

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?

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!

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

Thank you for coming today!