FinAid | Professional Judgment | Conflicting Information

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Professional Judgment

Conflicting Information

Published guidance indicates that the financial aid administrator must resolve conflicting information before disbursing aid or making a professional judgment adjustment. (See, for example, pages AVG-82/82, AVG-99, and AVG-101/102 of the 2007-2008 Verification Guide.) If the information on a piece of documentation, such as an income tax return, is not consistent with the information on the FAFSA, it represents conflicting information. Conflicting information can be resolved by changing the FAFSA to match the documentation or changing the documentation to match the FAFSA. Thus, if the FAFSA disagrees with the income tax return, either the FAFSA or the income tax return must be corrected. Nothing prevents a financial aid administrator from insisting that the family submit a corrected income tax return to the IRS.

It is not the responsibility of the financial aid administrator to audit tax returns. But if, in the course of normal work on the student's file the financial aid administrator encounters information that conflicts with the information presented on the FAFSA, the financial aid administrator has a duty to resolve the discrepancy before disbursing aid.

Generally speaking, financial aid administrators only need to resolve conflicting information when the discrepancy affects eligibility or is of sufficient magnitude to materially affect the amount and types of aid. (Minor mathematical errors or low order digit transpositions are not considered conflicting information and an amended income tax return is not required unless the errors appreciably affect the income or tax information reported on the FAFSA.)

Cases of conflicting information are always triggered by specific lines of the FAFSA and the discrepancy is readily apparent. Financial aid administrators do not need to go digging to see if the family cheated on their taxes. Financial aid administrators are not expected to be tax accountants. But financial aid administrators should be aware of basic information about income tax returns, such as the information found in IRS Publication 17, Your Federal Income Tax.

Most cases of conflicting information involve a simple test of whether the information matches or does not match the same information as reported on the income tax return. In particular, imputing asset levels from interest reported on the income tax return probably goes beyond one's obligation. However, if interest and dividend income or capital gains are reported on the income tax return, but no assets are reported on the FAFSA, that is a simple yes/no discrepancy that should be considered conflicting information.

The following are examples of conflicting information on income tax returns:

One of the people whose information was required on the FAFSA claims IRS nonfiler status, but there is reason to believe that they would have been required to file a US income tax return. (See the Tax Protestor section.)

Statements or information that suggests that the copy of the income tax return provided to the school is not the return actually filed with the IRS.

Dividend and interest income and/or capital gains on the income tax return that is not consistent with the assets reported on the FAFSA. For example, if the family reports no assets but the income tax return shows interest income, or if the interest income suggests a much higher level of assets than reported.

Adjusted Gross Income reported by student and/or parents.

Federal income taxes paid reported by student and/or parents.

Filing status reported by student and/or parents.

Exemptions reported by student and/or parents. For example, if the student is claimed as an exemption on both the student's and parents' income tax returns, or the number of exemptions listed on the income tax returns do not match the number of exemptions reported on the FAFSA. (The number of exemptions might not match when the parents have children from another marriage, when the parents are divorced, when there was a recent birth, adoption or death, or when the household size changed recently.)

Social security numbers reported by student and/or parents.

Address reported by student and/or parents (i.e., if parents are divorced and the address on the student's tax return does not match the address on the custodial parent's tax return). Another example is where the address does not match the state of residence as listed on the FAFSA.

Marital status reported by student and/or parents.

Miscellaneous line items reported on the FAFSA and Worksheets, such as line items relating to Earned Income Credit, Child Tax Credit, Deductions and payments to pensions and savings plans, IRA deductions, SEP/SIMPLE/KEOGH, tax exempt interest income, foreign income exclusion, untaxed portions of IRA distributions, education tax credits.

If the student or parents reported business/farm net worth but did not file a schedule C or Form 1120, or vice versa, mutatis mutandis.

Information reported on the "Tuition and Fees Deduction" line of the income tax return does not match information available to the school on Form 1099-T (i.e., families are prone to claiming the full amount of tuition, even though most of it was covered by financial aid). Moreover, even though financial aid administrators are not supposed to be tax experts, deductions relating to student aid do fall within the scope of a financial aid administrator's expertise.

In addition, if all of the family's W-2s and 1099s are not included on the income tax return, that is considered conflicting information.

On page AVG-101 of the 2007-2008 Application and Verification Guide the US Department of Education explicitly specified three tax issues that can give rise to conflicting information:

whether a person was required to file a tax return,
what the correct filing status for a person should be, and
that an individual cannot be claimed as an exemption by more than one person.

The verification guide further states that a financial aid administrator must question the filing status when "a dependent student's married parents have each filed as 'head of household'".

Sometimes a case will involve several different types of conflicting information. For example, it is not uncommon for students to incorrectly report 1099 income, such as non-employee compensation, on line 7 of the income tax return. Such income should be reported on line 12 (business income or loss) of IRS Form 1040, corresponding to the net earnings reported on Schedule C, and a Schedule SE filed to pay self-employment tax. This materially affects the EFC in two ways. First, it means that the FICA allowance calculated by the Federal need analysis methodology does not reflect the amount of FICA tax actually paid. Second, it means that the student may have filed IRS Form 1040A or IRS Form 1040EZ even though they were required to file an IRS Form 1040. The type of form the student was eligible to file can make a difference with regard to the simplified needs test and automatic zero EFC. In such a situation the financial aid administrator should require the student to file an amended income tax return.

Occasionally financial aid administrators will encounter a family where the parents are married yet they filed separate returns with at least one parent filing as head of household. A married individual can only file as head of household if he/she lived apart from his/her spouse for the last six months of the tax year, paid over half the cost of keeping up the home, and the home was the main home of the taxpayer's child, adopted child, stepchild, or foster child for more than half the tax year, and the child is claimed as a dependent. (Note that public assistance, such as TANF, does not count as money paid by the parent to keep up the home.) This is more consistent with parents who are unmarried, separated or divorced than with parents who are married. Although the parents could have reconciled after the end of the tax year, head of household filing status is prone to abuse and should be considered conflicting information when the parents indicate that they are married on the FAFSA. (Often taxpayers will file as head of household because it can reduce the total tax liability. However, if the parents were married and lived together at any point during the last six months of the tax year, it represents tax fraud. Note that temporary absences for business, medical care, school or military service count as time lived in the home, and so do not qualify the other spouse for head of household status.)

There are, of course, other possible sources of conflicting information that do not appear on tax returns, such as a student under the age of majority whose parents are divorced but no child support is reported on the worksheets.

Other sources of conflicting information can occur when the information reported on the FAFSA is not internally consistent. For example, if the number of exemptions listed on the FAFSA is not consistent with the household size or the student's dependency status, that is a potential source of conflicting information.

The financial aid administrator's options in the event of conflicting information on an income tax return include:

Requiring a letter from the tax preparer or accountant that adequately explains the situation. (Financial aid administrators should verify such a letter with an independent tax expert, as experience has shown such letters to be unreliable, even from reputable tax preparation firms.)
Requiring a letter from the IRS.
Additional documentation regarding the conflicting information, including possibly a signed statement explaining the discrepancy.
Requiring the family to correct the information on the FAFSA form.
Requiring the family to submit an amended income tax return to the IRS.
Requiring the family to submit IRS Form 4506 to obtain a copy of their return as filed with the IRS.

Conflicting information must be resolved before disbursing aid or making any adjustments via professional judgment. If conflicting information is discovered after disbursing aid, the financial aid administrator must reconcile the differences and require the student to repay any excess funds (unless the student is no longer enrolled).

If the financial aid administrator suspects that someone has misreported information or modified documentation (e.g., submitted a falsified copy of the income tax return) with intent to increase student aid eligibility, he or she is required to report it to the office of the Inspector General at the US Department of Education (1-800-MIS-USED). It would be a good idea to consult with the school's attorneys before reporting a case of fraud.

The US Department of Education and the IRS are implementing a limited data match, which will automate the identification of certain types of conflicting information.

The following is an excerpt from pages AVG-104 to AVG-105 of the 2004-05 Application and Verification Guide:

CONFLICTING INFORMATION
In addition to reviewing application and data match information provided by the CPS, a school must have an adequate internal system to identify conflicting information -- regardless of the source and regardless of whether the student is selected for verification -- such as information from the admissions office as to whether the student has a high school diploma or information from other offices regarding academic progress and enrollment status. The school is responsible for reconciling any conflicting information that it has with one exception: If the student dies during the award year, the school isn't required to resolve conflicting information.
If your school has conflicting information concerning a student's eligibility or you have any reason to believe a student's application information is incorrect, you must resolve the discrepancies before disbursing FSA funds. If you discover discrepancies after disbursing FSA funds, you must still reconcile the conflicting information and take appropriate action under the specific program requirements.
Subsequent ISIRs
You are required to review all subsequent transactions for a student, even if you have already verified an earlier transaction. First determine if the EFC or the "C" flags have changed or if there are new comments or NSLDS information. Also check any updates or corrections. If the EFC has not changed and there are no changes in the "C" flags or NSLDS information, no action is required. If the EFC does change but it either doesn't affect the amount and type of aid received, or the data elements that changed were already verified, then, again, no action is required. But if the EFC changes and the pertinent data elements were not verified and this affects the aid package, then you must investigate the matter. Of course, any time a "C" flag changes or NSLDS data have been modified, you must resolve any conflicts.
Discrepant tax data
We have already stated that financial aid administrators do not need to be tax experts when dealing with tax information from the student. Yet there are some tax issues that even a layperson with some information about basic tax law can evaluate. Because conflicting data often involve such information, FAAs must have a fundamental understanding of relevant tax issues that can considerably affect the need analysis. You are obligated to know: whether a person was required to file a tax return, what the correct filing status for a person should be, and that an individual cannot be claimed as an exemption by more than one person.
For example, an FAA noticing that a dependent student's married parents have each filed as "head of household" (which offers a greater tax deduction than filing as single or married) might question whether that is the correct filing status. Publication 17 of the IRS, Your Federal Income Tax, describes on p. 25 the requirements that a person must meet to file as head of household: you must have paid more than half the cost of keeping up a home for the year; you must be unmarried or "considered unmarried" (the definition of the latter is given on the same page) on the last day of the year; finally, a "qualifying person" must have lived with you in the home more than half the year (though your dependent parent does not have to live with you). A table for determining who counts as a "qualifying person" is given on page 26, and other important notes are on pages 25 and 26 of Publication 17.
Publication 17 is a useful resource for aid administrators. You can view it on the Web at www.irs.gov or you can call the IRS at 1-800-829-3676 to order a copy. Other frequent tax dilemmas that it addresses: the filing requirements -- i.e., who is required to file a return -- are on pages 7 and 8; and instructions on which form a person should file are on pages 10 and 11.
Resolution of conflicting information
You may not disburse aid until you have resolved conflicting information, which you must do for any student as long as he is at your school; even if the conflict concerns a previous award year, you must still investigate it. You have resolved the matter when you have determined which data are correct, which might simply be confirming that an earlier determination was the right one. And, of course, you must document your findings in the student's file.

The Department has published additional information in its worksheets that schools can use to review their conflicting information policies.