IRS Examining Education Credits
Education Credits Catch IRS Attention
The IRS is carefully monitoring taxpayers who claim education credits on their personal income tax returns due to increased filing of fraudulent returns. Accordingly, IRS audits of taxpayers claiming education credits are increasing. Can you substantiate your claimed education credits?
As we have been sharing with our clients, the Form 1098-T used by educational institutions is practically worthless. In fact, these forms (through the 2017 tax year) may have contributed to IRS audits. Most educational institutions left Box 1 blank and completed Box 2. Box 1 reflects the payments received by the educational institution from the taxpayer; whereas Box 2 reflects the amounts billed by the educational institution. The IRS could care less about the amounts billed. It bases the credit computation on the amounts paid. If Box 1 is left blank, then the IRS does not know how much was paid by the taxpayer for qualified tuition payments.
In addition to the problems associated with the Form 1098-T, the IRS has seen scammers file fictitious tax returns claiming the education credit as well as taxpayers overstating the amounts paid for qualified educational expenses. Thus, the need for the IRS to carefully monitor and scrutinize tax returns claiming the education credit.
Regardless of whether the 2018 Form 1098-T is completed properly by the educational institution or not, it is most important that taxpayers be able to substantiate their tuition (and other qualified expense) payments. The best ways to substantiate education credits is to (1) retain copies of all checks used to pay for qualified educational expenses; (2) obtain a copy of the bursar’s statement that shows types of expenses billed, amounts billed and amounts paid by dates; and (3) maintain a copy of your child’s college transcript to prove how many hours the student attended.
Dates of payments are most important. The qualified expenses must be paid during the tax year for an academic period that begins in that same tax year, or an academic period that begins in the first three months of the following tax year.
If monies are withdrawn from a Sec. 529 plan to make the tuition payments, the withdrawal dates are most important. Although not found in IRS publications, the withdrawals you take from your 529 account must match up with the payment of qualifying expenses in the same tax year. For example, if you withdraw 529 money in December for a tuition bill that isn’t paid until January, you risk not having enough qualified educational expenses during the year of the 529 withdrawal.
Only tuition paid to an eligible educational institution is eligible for the education credit. Eligible institutions are those who participate in a federal student aid program run by the U.S. Department of Education (DOE). The DOE publishes and posts on its website the U.S. Federal Student Aid Code List. Not all eligible schools are found on this list. If your school is not found on this list, the IRS recommends that you contact your school to get confirmation that it is an eligible institution.
Read our May 2, 2017 post regarding how to maximize PA tax deductions when making 529 contributions.
Read our October 7, 2014 post regarding how to use 529 withdrawals to maximize FASFA scholarship aid.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his