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Professional Judgment
 
Tax Protester

Most financial aid administrators will encounter one or two tax protesters a year. A tax protester claims that he or she is not required to file an income tax return even though his or her income is apparently large enough to require filing a return. Tax protesters may also claim that they can exclude certain income as non-taxable even though it is clearly subject to income taxes. They may claim that filing income tax returns is voluntary, or that the requirement to file an income tax return is unconstitutional, or that only foreign income is subject to income tax. Some tax protesters have been known to file IRS Form 1120S (for an S Corporation) without a corresponding IRS Form 1040.

If a student or parent is a tax protester, it is inappropriate to award aid because this represents conflicting information, as per 34 CFR 668.16(f) and pages AVG-84, AVG-104 and AVG-105 of the 2004-05 Verification Guide. See also the "Who must file" section of IRS Publication 17.

Page AVG-84 of the 2004-05 Verification Guide states: "If someone whose data were required on the FAFSA submits a signed statement claiming nonfiler status and you have reason to believe that person would have been required to file a U.S. tax return, this constitutes conflicting information and must be resolved. ... For example, in such a case, you might require a letter from the IRS, a copy of the applicable tax provision, or other documentation supporting the claim to nonfiler status. Conflicting information must be resolved before you can disburse federal student aid."

Guidance from the US Department of Education specifically indicates that all conflicting information must be resolved before professional judgment is used to make adjustments. Moreover, student aid may not be disbursed until the conflicting information is resolved. You cannot use professional judgment to allow the student to receive aid until the questions concerning nonfiler status are resolved. The bottom line is that tax protesters are not eligible for Federal student aid.

Note that in some cases a parent may have more income than the threshold required for filing but nevertheless not be required to file (i.e., a parent who was employed overseas and is so subject to the foreign income exclusion).

The best approach is to insist on a letter from the IRS indicating that the parent was not required to file. The school could also insist on the family submitting IRS Form 4506 Request for Copy or Transcript of Tax Form to have a copy of the income tax return as submitted to the IRS sent to the school. The school should not rely on a copy provided by the family, as some tax protesters may submit income tax returns to the school that were never filed with the IRS.

Tax protesters are fond of quoting statutes and regulations out of context, or to giving general citations to large bodies of the Internal Revenue Code. Such a citation does not qualify as "a copy of the applicable tax provision" for documenting nonfiler status. For example, tax protesters are fond of citing 26 USC 861 (often they will use the full citation: Title 26, Subtitle A, Chapter 1, Subchapter N, Part N, Section 861), and Title 26, Subtitles A and C (the large sections of the internal revenue code that deal with income taxes and employment taxes, respectively). Tax protesters are also fond of demanding to see a financial aid administrator's authority to request documentation.

Tax protesters may try to confuse you. For example, they may state that they are not required to file and cite 34 CFR 668.57(a)(4) as indicating that you should accept a signed certification instead. The intent of this regulation, however, is for low income families who are not required to file an income tax return because their income is below the relevant IRS thresholds. Tax protesters are required to file income tax returns, and so a signed certification is not sufficient.

Tax protesters may try to argue that financial aid administrators do not have the authority to require them to file an income tax return. Department guidance specifically indicates that the only way to resolve conflicting information involving an error or omission on an income tax return is to require filing an amended income tax return. If the tax protester does not file an income tax return, the conflicting information is not resolved, and therefore no aid can be disbursed.

 

 
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