The Department recently provided important updates about verification including revised guidance for acceptable documentation and new guidance on dealing with amended tax returns beginning in 2018-2019. This and other information can be found on the Department’s Program Integrity Website.
Q. Must an institution complete verification for a selected applicant who is eligible for both subsidized and unsubsidized Title IV student aid when the applicant chooses not to accept the subsidized aid?
A. An applicant who is eligible for subsidized and unsubsidized Title IV student aid may not avoid completing verification by accepting only the unsubsidized Title IV student aid. In such a case, the institution must complete verification for the applicant to be eligible for any Title IV student aid.
However, except for applicants who are in Verification Tracking Group V4 or V5, an institution may, on a case by case documented basis, disburse unsubsidized Title IV aid to those applicants who are selected for Verification Tracking Group V1 if the institution has determined that there will be a delay in the completion of verification.
Q. May an institution disburse unsubsidized Title IV student aid, i.e., Direct Unsubsidized Loans and PLUS Loans, prior to completing verification for a selected applicant who is eligible for both subsidized and unsubsidized Title IV student aid?
A. Except for applicants who are in Verification Tracking Group V4 or V5, an institution may, on a case by case documented basis, disburse unsubsidized Title IV aid to those applicants who are selected for Verification Tracking Group V1 if the institution has determined that there will be a delay in the completion of verification. When determining the amount of the unsubsidized aid to be disbursed, the institution must ensure that the subsidized aid the applicant is estimated to receive is considered. After verification is completed, the institution must ensure that both the subsidized assistance and the unsubsidized assistance are adjusted, if necessary.
Q. How are distributions from an Individual Retirement Account (IRA) handled by the FAFSA-IRS Data Retrieval Tool, and how should a school address any portion of such a distribution that is “rolled over” into another qualified IRA? How are distributions from pensions and other annuities treated?
A. IRS requirements, as discussed in IRS Publication 75 and IRS Publication 575, provide that most distributions from IRAs (as well as from most pensions and annuities) are treated as taxable income. However, those publications discuss allowing some or all of these distributions to be excluded from taxable income under certain conditions. If none of the exclusionary conditions apply, the tax filer is instructed to report the full amount of the distribution on IRS Form 1040 line 15b for an IRA distribution and line 16b for pensions and annuities. If, however, the tax filer is eligible to exclude some or all of the distributions, the IRS instructs the tax filer to enter the full amount of the distribution on IRS Form 1040 line 15a or 16a, as appropriate. The tax filer is then instructed to subtract from the amount in 15a or 16a any portion of the distribution that, under IRS rules, is exempt from being considered as taxable income. The difference is then reported on lines 15b or 16b, as appropriate, and becomes part of the taxable income and thus, part of the tax filer’s adjusted gross income (AGI). If there are qualified rollovers, the IRS guidance tells the tax filer to enter the word “Rollover” on the tax return next to line 15b or 16b. Note that the corresponding IRA line items for an IRS Form 1040A are 11a and 11b for IRAs, and 12a and 12b for pensions and annuities.
The summary above is not provided as official IRS guidance. Tax filers should consult the IRS or their tax advisors for definitive guidance on the rules governing the treatment of IRAs and pensions and annuities for tax purposes.
FAFSA Requirements: Generally, amounts of any distributions that were excluded from taxable income under the IRS rules—the difference between line 15a and line 15b or between line 16a and 16b—are considered untaxed income for the purpose of calculating an applicant’s expected family contribution (EFC), and therefore, should be reported on the FAFSA as responses to the IRA and pension questions. However, the calculation of an EFC allows for the exclusion of any amount of the distribution that is a rollover. Thus, the FAFSA instructions tell the applicant to exclude rollover amounts when answering the above FAFSA questions. This guidance is also provided in Chapter 2 of the Department’s Application and Verification Guide that is part of the Federal Student Aid Handbook.
IRS Data Retrieval Tool: Of course, the FAFSA-IRS Data Retrieval Tool cannot know if the word “Rollover” was included on the tax return. Therefore, it assumes that the total difference between the distribution reported on line 15a or 16a, and the taxable portion on line 15b or 16b is untaxed income for EFC purposes, and that amount will be transferred from the FAFSA-IRS Data Retrieval Tool into the FAFSA as untaxed income for IRA distributions or pension distributions.
The FAFSA applicant, the applicant’s parent, or the institution may modify the amount that the FAFSA-IRS Data Retrieval Tool transferred into the FAFSA, if all or a portion of that amount should not be included as untaxed income because of a rollover. To support such a change, the institution must maintain documentation (see below) that the amount not included in the FAFSA was an amount that was the result of a rollover.
Beginning with the 2018-2019 FAFSA processing year, if the applicant or the applicant’s parent indicate that the amount transferred from the IRS into the FAFSA for the IRA distributions field or pension distributions field includes a rollover, he/she will be required to provide the amount of the rollover in a new entry field. Our system will then subtract the reported rollover amount from the amount of the IRA or pension distribution that was transferred from the IRS, and the result will be used in the calculation of the applicant’s EFC.
Verification Requirements: Since neither the information from the FAFSA-IRS Data Retrieval Tool nor an IRS Tax Return Transcript will include the tax filer’s “Rollover” notation, to verify the amounts that should be included on the FAFSA, the institution must obtain a written statement from the tax filer indicating the amount of the distribution that was excluded because it was an authorized IRS rollover. Acceptable documentation could be a signed statement from the tax filer. Acceptable documentation could also be a notation by the tax filer on the IRS Tax Return Transcript that includes the word “Rollover” beside the applicable item(s) on the transcript, like the instructions provided for the IRS Form 1040 or 1040A. If the institution accepts as documentation of the rollover a notation on the IRS Tax Return Transcript, it must ensure that the notation is signed and dated by the tax filer.
If the IRA or pension distributions were the only tax information that was changed for tax filers who used the IRS DRT, an institution should accept from the tax filer a signed statement confirming that the IRA or pension distributions included a rollover. A tax transcript would only be necessary if other IRS tax information was changed.
Q. What FAFSA/ISIR information must be verified if an institution receives an ISIR with an IRS Request Flag value of 07?
A. An IRS Request Flag with a value of 07 indicates that the applicant or parent filed an amended tax return. Therefore, if an institution receives an ISIR with an IRS Request Flag value of 07, it must contact the applicant to obtain the documentation needed to make changes to any of the FAFSA/ISIR data items that were amended, regardless of whether those items are required to be verified. This applies beginning with the 2018-2019 FAFSA processing year.
Q. What documentation must be collected from an applicant who was selected for verification if the applicant and/or spouse, or parent(s) filed an amended tax return with the IRS?
A. The Department’s objective is to ensure that Title IV aid eligibility determinations are made based on the most accurate information possible. The FAFSA on the Web IRS Data Retrieval Tool (DRT) will only transfer certain tax information from an original tax return and none of the tax information from an amended tax return will be included. However, beginning with the 2018-2019 FAFSA processing year, the ISIR will indicate that the return was amended. Therefore, when an institution is aware that an amended tax return was filed, the institution must submit to the Secretary any changes to a nondollar item, or a single dollar item of $25 or more.
The institution must obtain a signed copy of the IRS Form 1040X that was filed with the IRS, in addition to one of the following–
• IRS DRT information on an ISIR record with all tax information from the original tax return; or
• an IRS Tax Return Transcript (that will only include information from the original tax return and does not have to be signed), or any other IRS tax transcript(s) that include all the income and tax information required to be verified.
Q. Is the information provided on a verification worksheet or other documentation at the institution sufficient to verify household size, number in college, or income earned from work for nontax filers; since the applicant signs the verification worksheet or other documentation submitted to the institution acknowledging that the information is correct?
A. A verification worksheet or other documentation at the institution may serve as the signed statement to verify household size, number in college, or income earned from work for nontax filers, if the worksheet or other documentation has a certification statement similar to what is included on the Department’s suggested verification text. An institution is not required to use the suggested verification text developed by the Department. It may use its own worksheet or require other documentation.