Verification: Indepth Tax Analysis

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Verification In-depth Tax Analysis 

• Unmasking the IRS forms, an in-depth analysis of
  the 1040 and attachments, and what financial aid
  professionals are required to know.
• Presenters  David Gelinas, University of the
  South                   Kalynn Wilczynski,
  Emory University              
• Moderator  Philip Hawkins, Shorter College
• SASFAA Feb. 12-16, 2006

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Why does this matter?

• Early priority filing date
• Most filers use estimated data
• Most of the aid awarded is from the institution
• To be better stewards of federal and
  institutional funds

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2005 Form 1040
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Whats new for 2005?

• Line 35- Domestic production activities deduction
• IRA deduction expanded
• 4000 or 4500 if over 50 years old
• Standard Deduction increased
• Single/ Married file separate 5000
• Married filing jointly or qualifying widow
  10,000
• Head of Household 7300

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What Were Looking For

• Inconsistencies between FAFSA (and CSS Profile)
  data and 1040 data
• Clues to questions we might need to ask
• Other documents we might need to collect such as
  schedules or business returns

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Starting at the Beginning

• Is this the most current tax return?
• Is this for the correct student/family that
  completed the FAFSA?
• Are the exemptions consistent with the number of
  family members on the FAFSA?
• What is the filing status?
• Married filing separate did we get both returns?
• What about Head of Household issues?
• Is the filing status correct?

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Verifying Income From Line Items

• Line 7 Is this consistent with reported earnings
  on FAFSA? Does this match W-2 if obtained?
• Lines 8a and 9a Are interest/dividend amounts
  consistent with reported assets on FAFSA?
• Is the Schedule B required?

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Verifying Income From Line Items (cont.)

• Line 12 Business Income (Loss), is there a
  business value reported on FAFSA?
• Lines 13 14 Potentially reportable assets
• Lines 15 16 Were distributions properly
  reported (taxed vs. untaxed) on the FAFSA?
• Was there a rollover?
• Was this a one time distribution?

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Verifying Income From Line Items (cont.)

• Line 17 Does this refer to a reportable asset?
• How do you treat losses for your IM?
• Line 18 Is this a reportable Farm asset
  according to the FAFSA?
• Line 20 Were taxable/untaxable portions reported
  properly on the FAFSA?

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Verifying Tax and Credits

• Line 50 Education Credit, was this properly
  reported on Worksheet C?
• Line 57 Was this correctly reported as Income
  Tax on the FAFSA?
• Many times line 63 is reported on the FAFSA

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Payments

• Line 66a Earned Income Credit- Is this verified
  on Worksheet A?
• Line 68 Additional Child Tax Credit- Is this
  verified on Worksheet A?

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WHAT ABOUT THOSE SCHEDULES?
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Schedule A- Why do we Bother?

• Line 1 Medical/Dental Expenses
• Easiest way to verify what was NOT covered by
  insurance
• Can be used as an allowance against income for IM
• What can we do for FM?
• Line 10 Mortgage Interest
• For IM- Does this make sense with was or was not
  reported for home value?

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Schedules A and B
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Schedule C The Sole Proprietorship

• Line 31 or 32 will reappear as income from line
  12 on the 1040
• Is the business run out of the home?
• How does this relate to the Business Value on the
  FAFSA? Is there a Business Value?
• For IM, what do you do with the following?
• Car/ Truck Expenses
• Depreciation
• Travel, Meals and Entertainment
• Take a look at Part V Other Expenses, what do
  you see?

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Schedule C
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Schedule D Capital Gains and Losses

• Lines 3 and 10 Amount reported are proceeds
• May have been reinvested
• Take a look at the amounts
• Could be day trading if the amounts are
  unusually large or extra pages attached

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Schedule D
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Schedule E Supplemental Income and Loss

• Income/ Loss will have a direct effect on
  personal income tax paid, appears on line 17 on
  the1040
• Page 1 is always in reference to rental
  properties
• Income received is reported on line 3 4
• Expenses are listed lines 5-10
• What do you do with depreciation for IM?
• Many times will show as a Loss
• How do you treat income/loss for rental
  properties?

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Schedule E (cont.)

• Page 2 is from Partnerships and/or S Corporations
• Businesses will be listed on lines 28 a-d
• Total Income (Loss) is shown on line 41, carried
  to line 17 on 1040
• Many times listed as a loss
• Is this their primary source of income?
• Just used as a tax shelter?

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Schedule E (cont.)

• For Further Detailed Information you need to
  obtain the following
• Form 1065 for any Partnerships
• Form 1120 S for any Sub Chapter S Corporations
• Schedule K1 for each partner
• This shows the shareholders specific share of
  income, rather than for all members

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Schedule E pages 1-2
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Form 1065 Partnership pgs 1-2
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Form 1065 (cont. pgs 3-4)
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Form 1120S S Corporation pgs 1-2
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Form 1120 S (cont. pgs 3-4)
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Any Questions?

• Thanks for coming, enjoy SASFAA!