On or before January 31 each year, taxpayers generally begin receiving IRS tax reporting correspondence for the previous calendar year, such as W-2s or Forms 1099 and 1098, either electronically or by postal mail. For a taxpayer who has paid tuition from an eligible educational institution, Form 1098-T is particularly important. It provides the information the taxpayer can use to claim the American Opportunity Tax credit on his or her federal income tax return. In most situations, the educational institution sends Form 1098-T to the taxpayer. But what happens if the taxpayer doesn’t receive the form or if the information in the form for reporting purposes is incorrect?
FAILURE TO RECEIVE THE FORM
Some confusion exists about when or if an educational institution needs to issue Form 1098-T. There are some exceptions to when an institution needs to send out the form. When applicable, institutions should take advantage of these in order to lessen the cost and time burden of processing and sending out the form.
Without getting into all the exceptions, the one at the crux of this article is that an educational institution doesn’t have to file the Form 1098-T or furnish a statement for students whose qualified tuition and related expenses are waived entirely or are paid entirely with scholarships. Both the IRS instructions and Federal Tax Regulations spell this out. Specifically, Reg. §1.6050S-1(a)(2)(iii) states that “[t]he information reporting requirements of this section do not apply with respect to any individual whose qualified tuition and related expenses are waived in their entirety or are paid entirely with scholarships” (emphasis added).
This might create an issue with a student who’s paying a percentage of his or her tuition and not 100% of it. Military veterans, for example, are generally in this situation. They don’t receive total tuition remission—they might pay 30% but still may not receive their Form 1098-T. Why? Timing and reporting. We know the federal government is generally good at paying the money it’s supposed to, but the timing of those payments may vary. Thus, the veteran student may have received payments from the government in one taxable year that exceeded the billed tuition for that calendar year because those payments were actually due in the prior year. Thus it would appear as if the student received more than 100% of tuition, and the educational institution would likely not issue the Form 1098-T. In other words, the spirit of the tax law isn’t being followed because of a timing issue.
Form 1098-T doesn’t only assist in determining the amount of the qualified educational tuition and related expenses for the taxpayer’s credit or deduction. It also serves to report and confirm to the IRS other items of relevance for the student. For example, the form proves that the student is attending an eligible educational institution, that the student attends school at least half-time, and whether the student is an undergraduate or graduate student. The tuition statement requirement has been added to the proposed regulations for the calculation of the education tax credits pursuant to the Protecting Americans from Tax Hikes Act of 2015 (PATH Act, P.L. 114-113). Without Form 1098-T, the taxpayer isn’t entitled to take the credits unless the individual can show that he or she has requested the Form 1098-T. Specifically, Prop. Reg. §1.25A-1(f)(1) states “no education tax credit is allowed unless the taxpayer (or the taxpayer’s dependent) receives a statement furnished by an eligible educational institution.” An exception is noted at Prop. Reg. §1.25A-1(f)(2) that allows the credit if the taxpayer or the taxpayer’s dependent has “requested, in the manner prescribed in forms, instructions, or in other published guidance, the eligible educational institution to furnish the Form 1098-T after January 31 of the year following the taxable year to which the educational tax credit relates but on or before the date the return is filed claiming the education tax credit.” This creates quite a hassle if a student doesn’t receive the Form 1098-T and is entitled to an educational credit or deduction! Moreover, the taxpayer or tax preparer could just miss the opportunity to take a credit or deduction because the Form 1098-T wasn’t received to remind them.
Some universities report billed tuition and not actual paid tuition on the Form 1098-T they issue to taxpayers. This reporting of billed vs. actual paid tuition creates a dilemma for the taxpayer. Most individual taxpayers are cash-basis taxpayers and, therefore, need to report actual paid tuition when claiming educational tax credits. If the taxpayer doesn’t receive Form 1098-T, there’s a good possibility that the educational credits and deductions may be missed and not taken on his or her tax return. But if it’s received and the tuition amounts reported are billed and not actual, the taxpayer may be reporting the wrong amounts.
There is a remedy for this dilemma. The passage of the PATH Act of 2015 requires eligible educational institutions to report on Form 1098-T beginning for tax year 2016 the aggregate amount of payments received for qualified tuition instead of the aggregate amount billed for qualified tuition. The implementation of this tax law would better ensure that a taxpayer will receive the amounts on the Form 1098-T that can be directly put on the tax returns without making any adjustments between the billed and actual amounts paid.
Although the law was effective for tax year 2016, its implementation has been delayed due to concerns raised by many eligible educational institutions regarding the necessary software and other processing changes needed to issue the Form 1098-T on the actual paid tuition instead of the billed tuition. In response to these concerns, the IRS extended the due date to tax year 2017 as noted in IRS Announcement 2016-17 (April 27, 2016) and then again extended the due date to tax year 2018 per IRS Announcement 2016-42 (November 17, 2016). The 2017 IRS instructions specifically spell out that “only the qualified tuition and related expenses actually paid can be reported on Form 1098-T” beginning in 2018, and so far there doesn’t appear to be an IRS announcement to say otherwise.
Even if the timing of this issue slips another year or so by permission of the IRS, at least better reporting of the Form 1098-T is coming. In the meantime, however, taxpayers and tax preparers need to be careful that they don’t miss the educational credit or deduction when preparing a tax return, and they should be prepared to file an amended one if applicable.