Colleges and universities have until October 31 to respond to proposed changes to the rules governing education tax credits and Form 1098-T, Tuition Statement. The Department of Treasury and the Internal Revenue Service (IRS) published a notice of proposed rulemaking (NPRM) on August 2 to implement statutory changes enacted late last year.
The changes included (1) providing a solution to the fines recently assessed many institutions for missing or incorrect taxpayer identification numbers; (2) eliminating the option for schools to report amounts billed for qualified expenses instead of amounts paid; and (3) for the first time, mandating that taxpayers have a Form 1098-T in order to claim certain education tax benefits. The proposed regulations reflect these legislative changes.
The NPRM also recommends additional changes, requiring colleges and universities to file 1098-Ts for some groups of students that are currently exempt and creating new categories of information that they will need to collect and report on the Form 1098-T.
The Trade Preferences Extension Act of 2015 (TPEA) requires that, subject to exceptions specified by IRS in regulations, taxpayers will not be able to claim an education tax credit or deduction unless they receive a Form 1098-T from the educational institution. In the proposed rules, the IRS recognizes that the amount reported on the Form 1098-T will not necessarily reflect the total amount of qualified tuition and related expenses (QTRE) paid by the taxpayer during the tax year, because some expenses, such as books or required supplies not purchased from the institution, are not required to be reported on the form.
The TPEA also fixed a problem that had been plaguing colleges and universities for several years. The provision, introduced by Sen. Dan Coats (R-IN), does not allow the IRS to impose penalties on an institution for failure to include a correct taxpayer identification number (TIN) on Form 1098-T if the school certifies, at the time of filing, that it has complied with IRS requirements for soliciting TINs.
In the most impactful change, the Protecting Americans from Tax Hikes (PATH) Act of 2015 eliminated the option to report the aggregate amount billed for qualified tuition and expenses in Box 2 of the form. Although this provision took effect for 2016, the IRS announced earlier that no penalties will be imposed for calendar year 2016, if an institution fails to comply with the amendment and continues to report the amount billed.
It also amended the provisions governing the education tax credits in section 25A(i) such that no American Opportunity Tax Credit will be allowed unless the student’s TIN and that of the taxpayer claiming the credit are issued on or before the due date (including an extension, if requested in a timely manner) for filing the return for that tax year. Taxpayers’ returns will also now need to include the employer identification number (EIN) of any institution to which the qualified tuition and related expenses were paid for the student.
Beyond the Statutory Changes
The proposed rules make changes both to the rules governing the education tax credits under 1.25A and those detailing the related information reporting requirements under 1.6050S to implement the statutory changes. In addition, the NPRM proposes changes to existing reporting exceptions and introduces new information that colleges and universities will need to collect and report on the Form 1098-T.
In light of the new requirement that students receive 1098-Ts in order to claim benefits, the IRS proposes to limit the number of reporting exceptions. The NPRM would require Form 1098-T reporting for the following student populations, for whom institutions have not previously been required to report:
- Nonresident aliens (NRAs).
- Individuals whose QTRE are paid entirely with scholarships.
- Individuals whose QTRE are paid under a formal billing arrangement (where no individual student account is established).
The proposed rules preserve the reporting exception for courses for which no academic credit is awarded, recognizing the difficulty many schools would face to incorporate them. However, the IRS is seeking comments regarding the exception for noncredit courses and asking whether there should be a change to the exemption.
The IRS also asks for specific comments on the removal of the NRA exception, including how an institution determines a student is an NRA and information about how institutions currently administer the existing exception to reporting. Now, schools are only required to provide a 1098-T for an NRA upon request.
The biggest change for the majority of institutions will be the need to report payments made, rather than amounts billed, for QTRE. The IRS proposes to stipulate that any payments received on behalf of a student, regardless of source, be treated as paying qualified expenses (except for aid restricted to other charges) up to the amount billed. The NPRM offers a number of new examples to illustrate the interplay between payments, refunds, and calendar years.
The proposed rules would add two new data elements to the 1098-T:
- The amount paid that relates to an academic period that begins in the first three months of the next calendar year. Current rules require only checking a box indicating that some amounts reported are for an academic period beginning during that time.
- The number of months the student was enrolled full time during the calendar year. Each month in which a student was enrolled for at least one day would count as one month. This is aimed at verifying the dependent status of students.
Joel Levenson, associate controller at the University of Central Florida, Orlando, and NACUBO’s representative to the Service’s Information Reporting Program Advisory Committee (IRPAC), recently outlined for IRS officials some of the challenges and issues identified by colleges and universities in the NPRM.
During the August 16 meeting of IRPAC, Levenson expressed gratitude to the IRS for the delay of implementation for mandated reporting of amounts paid for qualified tuition and expenses. He also discussed some of the more troublesome provisions included in the proposed rules—in particular, the new requirements mentioned earlier that go beyond the statutory changes made last year.
Levenson’s takeaway from the meeting was that it would be valuable for the IRS to hear from individual colleges and universities in response to the NPRM. He and NACUBO urge institutions to craft their own comment letters to the IRS and include the following information:
- The increase in the number of 1098-Ts your institution would need to report if the proposed rules were adopted without changes. This will be helpful in identifying not only the administrative burden on your institution, but will inform the IRS about how many more forms its agency would be faced with processing.
- The higher cost for your institution to generate the additional 1098-Ts.
- Examples of how the proposed payment and refund priority assumptions may lead to confusion when compared to the student’s actual account activity.
- Costs and amount of time that will be required to reprogram student information systems to implement new reporting items (e.g., number of months of full-time enrollment, amounts received for academic terms beginning in the following tax year, and so forth).
The deadline for comments is October 31, and a public hearing will follow on November 30, in Washington, D.C.
NACUBO is currently reviewing the proposal and will submit comments advocating for reasonable rules and fair guidance that institutions can follow. We strongly encourage individual institutions to submit comment letters to the IRS. Please send copies of your school’s comments to firstname.lastname@example.org.
NACUBO CONTACT Mary M. Bachinger, director, tax policy, 202.861.2581