Audited over Scholarshare 529 withdrawals?

<p>I'm curious if this is happening to anyone else. I received a notice from IRS saying I owed back taxes from 2007 based on my withdrawals that year from the Scholarshare 529 plans I had for my two sons. All of my withdrawals were "qualified" - that is, the money went for room and board for the students, in an amount less than the official "cost of attendance" figures the University uses.</p>

<p>I'm not clear why Scholarshare reported this to IRS as income. other than the fact that I changed to a different 529 plan last year. Has anyone else had the same thing happen?</p>

<p>No, and I sure hope it does not. My withdrawals are also for room and board.</p>

<p>Why would it be reported as income, if it was withdrawn from a 529? I'm confused.</p>

<p>It's not very clear, but I think the part of the withdrawal which represented income of the fund since I set it up was reported as income to me (as would be proper if I hadn't spent the mony on qualified educational expenses for my kids.) </p>

<p>Oh, geez - I just realized I had my "senior moment" - CC-wise - with that last post. 1,000 posts.</p>

<p>Was the withdrawal in 2007 used to pay qualified expenses due in 2007? The year of the withdrawal and the year of the expense needs to match up exactly. You can't pay a bill due in January by withdrawing from a 529 the December before. </p>

<p>If you're ok there, then the IRS shouldn't be dinging you for back taxes.</p>

<p>I believe the withdrawals will be reported to the IRS regardless (your 529 plan administrator doesn't know the timing of your QHEE) but there should be no taxes due.</p>

<p>Good luck and let us know what happens.</p>

<p>I wish I could remember more details, but I get 529 payments to me (parent) and got a similar letter from the IRS. After calling the IRS, I was told that they just didn't have a good mechanism for identifying 529 payments. I was told to return the forms writing in certain information on them. No "proof" was necessary, and that was the last I heard of it. I suggest you look for an information number of the papers and explain the situation. They gave me an easy solution.</p>

<p>Thanks, Mythreesons. I was taken aback by the reference to supplying "documentation." I'm guessing (and hoping) that you're right. It didn't happen in previous years.</p>

<p>hmm...I haven't taken funds out of my 529 plans yet, but when asking ?'s was told about this taxable income issue and I was confused..so look forward to hearing more about this</p>

<p>I called the administrator of our 529 account to figure out how this all works when you use funds from that account for room and board that's not paid directly to the school. I was told to keep receipts/documentation to prove that we spent the money on housing, books and food. I was told that I may never be asked to provide this documentation, but that it is prudent to have it just in case.</p>

<p>We were audited, too but we don't have anything called Scholarshare - it was, though, a 529. We had to submit a detailed bill from the university, which we did, and in the end we owed $1.</p>

<p>I also got a letter regarding a withdrawal from our 529 for 2007. Some had been paid directly to the school and some to us for room, board, and books. I sent a letter back stating that the withdrawals were used for qualified expenses, giving the amounts for each. I got a letter back from the IRS a couple of months later stating the case had been resolved and I didn't owe any taxes. They didn't ask for documentation (although I had it if it had been needed). I sure hope this doesn't happen again for each year!</p>

<p>Letter here too.</p>

<p>Just give them the info. It all worked out fine.</p>

<p>Someone asked me about this today. For winter quarter the bill is posted on the student's account on Dec. 15th. It's due Jan. 1, it's past due by Jan. 10. It takes about 8-10 days for the disbursement to go from initial request to money in the bank.</p>

<p>If the whole thing (disbursement request and paying the college bill) is in 2010, they run the risk of not meeting the past due deadline of Jan. 10th. But since the bill is posted to the student's account in mid-December (even though it's not due until Jan. 1), can the family take the disbursement and pay the bill for winter quarter before the end of 2009?</p>

<p>I was stumped.</p>

<p>We have a similar issue, but our bill wasn't due until the 10th of Jan. last year. Is there any way you can get the money faster either by wire (there is a fee for this at most banks) or electronic transfer? I had the owner of the account call on Jan 2, and I think we had the check 5 days later, which took a few days to clear, then paid the bill by ACH transfer. It was a close call, but I didn't feel we had any other option.</p>

<p>We had the 529 pay the school directly. If there was an overpayment in student's account, the excess was refunded to student then of course to me. </p>

<p>My student lived on campus and had a campus debit card, thus we didn't have track QE's.</p>

<p>Thanks for all of the responses. Our 529 withdrawals that year were only about 75% of the Universities' off-campus room and board figures from the financial aid cost of attendance worksheet, so I'm going to send in that info and see if it all works out.</p>

<p>Thought I'd bring this forward to let you all know what happened. I sent a written response in to IRS explaining that the funds were withdrawn to cover collegiate room and board, in an amount less than the college's stated cost of attendance, with documentation of the amounts. As predicted, IRS responded a couple of months later accepting the explanation. It seems like there's no way for IRS to track these withdrawals and they (somewhat randomly) send out "bills" for the portion of the withdrawal which exceeds the initial amount deposited.</p>

<p>Glad it worked out.</p>

<p>Thanks for the update.</p>