David Gelinas

Senior Associate Dean &Director of Financial Aid

Davidson College

Reviewing Tax Returns for Verification Purposes

What do we do?Perform 100% verificationRequire ALL pages of personal tax

returnRequire all W-2s and 1099sRequire student tax return and W-

2s/1099s (all pages)Optionally request business tax

returns and Schedule K-1s

Why do we do this?Early filing deadlineHeavy use of estimated data by filersVariation between PROFILE and

FAFSA data#1 source of assistance: Institutional

fundsStewardship responsibility to school,

federal funding sources and state funding sources

What are we looking for?Inconsistencies between application

(PROFILE and/or FAFSA) data and tax return data

Clues to questions we may need to ask

Clues to other documents we might need to see

What are we looking at?References are to 2008 Form 1040

Greatest number of opportunities for tax filer to adjust income

Greatest likelihood to find errors

Greatest number of extra items reportable on PROFILE

Starting with the basicsIs this the tax return from the correct income

year?Does it reflect the correct filing status?

The ever-popular Head of Household issueIf Married Filing Separately, did we get

both returns?Are the exemptions consistent with the

reported family size?Don’t have to match, though

One looks back (exemptions); the other looks forward (household size)

Looking at the line itemsLine 7 (Wages, salaries, tips, etc.)

Is this amount consistent with reported earnings on PROFILE/FAFSA?

Does this match what’s on Forms W-2?Lines 8a (Taxable interest), 8b (Tax-exempt

interest) and 9a (Ordinary dividends)Are these amounts consistent with what’s

reported on PROFILE/FAFSA?Is Schedule B required?

Looking at the line items (cont.)Line 12 (Business income or (loss))

Is there a business asset reported on the PROFILE/FAFSA? Should there be?

Line 13 (Capital gain or (loss)) and Line 14 (Other gains or (losses))Are there potentially-reportable assets?

Looking at the line items (cont.)Line 15 (IRA distributions) and Line 16

(Pensions and annuities)Were distributions (taxed and untaxed

portions) properly reported?Was there a rollover?Was this an exceptional

circumstance? PJ?Line 17 (Rental real estate, etc.)

Does this refer to a reportable asset?How do you treat losses if you use IM?

Looking at the line items (cont.)Line 18 (Farm income or (loss))

Is this a reportable asset (FAFSA issue)?

Line 20 (Social security benefits)Were taxed and untaxed portions properly reported?

Were dependent benefits properly reported?

Line 21 (Other income)Anything of interest here?

Adjusted Gross IncomeLines 23 through 35

Some adjustments used for both FM and IM; some for IM only

Line 28 (Self-employed SEP, SIMPLE and qualified plans) and Line 32 (IRA deduction)Were these correctly reported on PROFILE/FAFSA?

Credits and Income Tax PaidLine 50 (Education credits)

Were these properly reported?Is there Form 8863 to support these credits?

Line 56 (Subtract line 55 from line 46)THIS line is “income tax for 2008”NOT Line 61 (total tax)

Line 57 (Self-employment tax) is (somewhat) accounted for in the EFC formula

PaymentsLine 64a (Earned income credit)Line 64b (Nontaxable combat pay

election)Line 66 (Additional child tax credit)Line 70 (Recovery rebate credit)

NONE of these are reportable as untaxed income

Accompanying SchedulesSchedule A (Itemized Deductions)

Line 1 (medical/dental expenses)Are excess expenses being itemized?Grounds for PJ treatment in FM?

Accounted for under IMLines 10 and 11 (mortgage interest)

For IM purposes:In line with reported home value/debt?Does AGI show ability to support this

expense?

Accompanying Schedules (cont.)Schedule C (Profit or Loss from

Business (Sole Proprietorship))Line 31 will appear as income on Form 1040, Line 12

Is the business being run out of the home? (Line 30)Add this deduction as untaxed income for IM?

Should there be a business value reported on the FAFSA?

Accompanying Schedules (cont.)Other Schedule C questions:

What to do with car/truck expenses? (Line 9)Look at Part IV, Information on Your Vehicle

Treatment of depreciation? (Line 13)Treatment of travel, meals and entertainment? (Line 24)

Anything of interest in Part V, Other Expenses?

Accompanying Schedules (cont.)Schedule D (Capital Gains and Losses)

Appears on Form 1040, Line 13Lines 3 and 10 represent proceeds from sales

Line 3: short-term (bought and sold in same calendar year)

Line 10: long-term (bought in prior calendar year; sold in this one)Even if Line 10 shows a loss, does it

represent a form of income (IM only) in the current calendar year?

Your thoughts?

Accompanying Schedules (cont.)Schedule E (Supplemental Income and

Loss)Appears on Form 1040, Line 17Page 1 covers rental property and royaltiesIncome received is reported on lines 3 and 4

Expenses are reported on lines 5 through 18

Depreciation is reported on line 20Add back in under IM?

Accompanying Schedules (cont.)Schedule E (cont.)

Page 2 covers Partnerships, S Corporations, Estates and Trusts, and REMICsPartnerships/S Corporations are listed on

lines 28A through 28DQuestions under IM:

Is this the family’s primary source of income?

If not, how do you treat it?Allow losses? Add back in as untaxed

income?

More on Schedule ETo dig even deeper, you can

request the following:

Form 1065 for PartnershipsForm 1120-S for S CorporationsSchedule K-1 for each shareholderShows the shareholder’s specific share of the income

Accompanying Schedules (cont.)Schedule F (Profit or Loss from Farming)

Appears on Form 1040, Line 18Depreciation is reported on Schedule F, Line

16Add back in under IM?

Questions under IM:Is this the family’s primary source of income?If not, how do you treat it?

Allow losses? Add back in as untaxed income?

In ConclusionWhere you stand on this level of verification

depends on the seat you’re sitting in

Mostly (or entirely) state and federal aid? NAH!

High volume of applications? PROBABLY NOT

Heavily institutional aid? ABSOLUTELY!

Credit where credit’s dueTo Kalynn Wilczynski, formerly of

Emory University

To my many colleagues over the years who keep asking for this presentation

To my applicant families for providing a never-ending stream of raw material

Thank you for coming today!