1098T Scholarship Box

[Snaggletooth]

A 1098T shows $5300 for "qualified expenses" but shows $4800 for "scholarships and grants." Obviously, a potential credit (or adjustment) is borne for the $500 difference.

Can the taxpayer, as an option, claim the $4800 as income for purposes of claiming the full $5300 for use as a credit? I know some forms of financial assistance may be claimed as income, but is this true in general for ALL such money appearing on a 1098T?

Thanks, Ron Jordan

[Koss]

Scholarships

It is not the reporting document that determines the treatment of an item; rather, it is the source of the funds that determines the appropriate treatment.

I believe the IRS has accepted the position that a scholarship or grant can be treated as fully taxable on Line 7 of Form 1040, and that this allows the taxpayer to then claim the education credit (or tuition and fees deduction) for any qualified educational expenses.

I also believe the IRS pays little or no attention to Forms 1098-T, except possibly to track whether a student meets the half-time requirement, and whether a student is an undergraduate or grad student. There is no consistent approach to reporting on these documents.

Be careful with your particular scenario. Books are "qualified" expenses when determining whether a scholarship is taxable. They are not qualified expenses for purposes of the education credits.

There may be books included in the $5300.

The treatment and classification of income and expenses are not driven by the reporting documents. It is the other way around. The reporting documents, in theory, should accurately reflect the type of income or expense. But if they do not, the taxpayer can and should report on the tax return what actually happened, regardless of what may be on the reporting documents. The IRS often does the same thing in an audit. Reporting documents will be disregarded if they do not reflect reality.

Best example: reclassifcation from independent contractor to employee.

Burton

[Gretel]

Scholarships

Ron, last year we had lengthy discussions on this topic.

It seems to be that if the scholarship itself stipulates to be used for tuition only, than you are out of luck with not using it to reduce the expenses for tuition. Only if the scholarship is silent on what it should be used for you can claim the tuition expenses and include scholarship in income.

[Snaggletooth]

License to do anything

Thanks Koss and Gabriele for commenting. The sad fact is that virtual ignorance exists among the colleges as to how to issue these 1098T information returns. Seems as if no two colleges are alike. And unlike W-2s, W-3s, 1099s, etc. the university system is under no compunction under threat of penalty to clean up their act. There is no penalty statute, and even if there were, IRS would not politically be up to the task.

However, the fact that numbers DO exist on certain boxes gives the tax preparer license to interpret them in the most beneficial manner for our clients. Provided the tax preparer has no knowledge of anything to the contrary. Our clients will not know what this stuff is. They will know what they've paid and usually what they've paid for, but would not be expected to know which expenses qualify or whether a scholarship/assistance could be construed as taxable or not. This is OUR job, more so than theirs.

We should do our best (in the spirit of interpreting as Burton suggests), but we really have no source of information other than the 1098T and the parents/students. Often nothing definitive comes from this combination of sources. Fact of the matter, the IRS is not interested in launching a mass investigation every time a 1098T is wrong either, and most of the time they won't even know.

Does this give us "license to do anything" with respect to the 1098T? I think to the extent of our scienter, my answer leans more "yes" than "no." We can't just back off and not do the best for our clients.

[Gretel]

So, in your words

...we are not criminal investigators to dig deep into things, which are not our business nor does the IRS.

So if our clients don't know, we can assume the best for our clients. Motto: Your are innocent until guilt is proven.

I really like that. Do you tell your clients that you decide something in favor of them and that maybe, maybe in 100 years someone could question it? Or do you just do it and deal with it later, if at all?

[Snaggletooth]

Not that Simple

Gabriele, not as simple as routinely doing this, but after making a genuine effort, I WILL assume the best and I will tell my customers I am doing so. The process involves dragging the parents/students into the discussion anyway in an effort to determine the truth.

Example: a liberal interpretation of a botched 1099T results in an $800 benefit to the client. the worst interpretation of the same document results in a $200 benefit to the client. The "adjustment" box contains $1400, and the customer doesn't know what it's for. The "scholarships and grants" box contains $1000 and the customer is aware that the student received this much in assistance but has no idea whether it is taxable or not but tells you that there were "strings attached" to the money. The "qualifying expense" contains another amount of money which the client confirms but claims he paid more than this if you include the amount he paid in the Fall of 2004.

Do I know what the customer qualifies for, given the above, or whether I have the option of claiming the scholarship as "income?" In all honesty, probably not, and no amount of questions posed to the client will solve this. However, will I take the $800 benefit for the customer instead of the $200 benefit?

YOU BET I WILL!!!!

Given the same document, will the IRS allow an $800 benefit? Probably not, although with the above information, no one could say that my client did not actually incur circumstances which entitled him to that amount. If the 1098T reporting is a train wreck, then imagine what the IRS information return "matching" process might be.

Am I being honest? Am I disclosing the situation to the client? Am I acting in my client's best interest? I say "yes" to all three questions, but will let others determine that for themselves.

Thanks for reading, Ron J.