3 of my clients have received bills due to distributions from 529 Plans. In all three cases the money was used to pay qualifying expenses. My reading of the instructions is that if the money was used to pay qualifying expenses we make no entries on the tax return about these distributions. Is anyone else having this issue?
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Yes, one of my clients has also received that notice. It is puzzling since the IRS's own instructions say not to report 529 distributions if the funds were used to pay qualified education expenses. If the IRS is now going to write to everyone who received a 529 distribution, it would make more sense to devise a form, to be attached to returns, where the distributions would be reported as well as the taxable (if any) and non-taxable portions.Roland Slugg
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It is probably a computer glitch. Write a letter back explaining why the 529 distribution is not taxable and not reportable on the tax return. After IRS receives a few thousand of these letters, they will probably correct the problem.Comment
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The Service has always done this type of thing. They are not as dumb as some people would think. They will continue to send this type of letter as long as their are some people out there who will pay the bill without hesitation.Originally posted by Kram BergGold View PostComment
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No, I disagree. I think they are as dumb as we think they are.Originally posted by jimmcg View Post
IRS is not in the business of fooling people into paying more than they need to. They already have enough trouble just trying to collect all of the legitimate taxes that are due. If IRS actually had a policy to fool people into paying taxes that are not real, some of those in the publishing business would be raking them over the coals for it.Last edited by Bees Knees; 09-13-2010, 05:51 PM.Comment
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Besides, fooling people into paying unnecessary taxes isn't the job of the IRS - the politicians are in charge of that task."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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Just an update on a visit to an IRS field office this morning. Has renovated space again -- now have secreted all Publications behind barriers so public has no access other than to go up to counter and ask. Problem with that: now counter has been moved back 20 feet, a line drawn 20 ft in front where you must stand before approaching, and await whim of service person who works on computer between customers. (He does not help anyone - just assigns a line number, inputs type of service desired -- maybe he will get a form if that's all you want -- for other service persons hidden behind closed cubicles.) Replaced clock-in device which did same thing previously. State of the art electronic monitors in ceiling show # of person being helped in cubicles (no order in these numbers, so you don't know if you are next). Depends on what you want. Armed guard is positioned back around corner, not visible from door, watching..... If you wish to use the restroom, he has to open it for you. Waited for 7 minutes for counter person to look up from what he was doing after last custormer left counter (one still in front of me) and I left. Lady who had advanced to seating area, having only check and voucher in her hand, also walked out before I did. Probably wanted to make a payment. Real friendly place.Comment
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It takes much less effort on the part of the Service to "fool people into paying more than they need to" as opposed to collecting all of the legitimate taxes that are due.Originally posted by Bees Knees View PostComment
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The distributions are supposed to be either to the institution (college or university) or to the BENEFICIARY, not to the parent. So how is the IRS supposed to know if the parents took out the money to buy a new car or to pay for junior's education? So every time mom or dad takes the money out, there is a box checked saying the distribution did not go to the beneficiary. If this box is checked, the person to whom the distribution was made (ie the SSN on the 1099-Q) is going to get a notice and have to show where the money went. Also, the distributions have to be coordinated with other education benefits. No conspiracy theories here, its your CLIENTs that did it wrong.Comment
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I wonder if they've deployed some half-way intelligent cross-checking. In the cases you've seen, was the taxpayer the beneficiary, a parent, or someone else? Did the taxpayer take any education credits?
When a 529 distribution is paid directly to the beneficiary or to an educational institution, the 1099-Q is supposed to have the beneficiary's SSN. In that case, the beneficiary will mostly likely receive a 1098-T, which complements the distribution. In these cases, I wouldn't expect the IRS to send any letters.
However, if the distribution is paid to the account owner, typically a parent, then they'll have the account owner's SSN. Often the parent will still be able to claim an educational credit as well, and that will indicate to the IRS that at least there were some associated expenses. But if the numbers or situation works out so that no credit can be claimed, especially if the beneficiary of the 529 isn't a dependent of the taxpayer, then the IRS doesn't have easy confirmation of matching educational expenses. In this situation, they may have decided that there are enough cases where taxes are owed to justify sending out the letters. Or perhaps they're experimenting, to find out whether it's worth putting more effort into this area.Comment
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All the cases I've seen have the parent taking the distribution. And a lot of the time, the income is far too high to take an education deduction or credit. I've also seen cases where the full amount of tuition was used for the credit/deduction, and without proving addtional expenses (the stuff you can use for a 529 plan that you can't use for the tuition credit/deduction like books, computers, room & board), the income is taxable.Comment
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