An IRS audit can seem daunting, especially when it concerns something as important as your 529 plan. However, with the right preparation and understanding, navigating an audit can be a manageable process. This article aims to guide 529 plan holders on what to expect and how to prepare if the IRS reviews their fund usage.
Firstly, it's important to understand that an IRS audit is a standard procedure to verify the accuracy of filed information. For 529 plans, this usually involves confirming that the funds were used for qualified educational expenses in the correct timeframe.
These three tips will go a long way to ensuring a smooth and easy audit process, with no unnecessary taxes or penalties.
Ensure that you're clear on what the IRS considers qualified educational expenses. This typically includes tuition, mandatory fees, books, supplies, and equipment required for enrollment or attendance, and certain room and board costs.
You can read more about what qualifies in our article Navigating Education Expenses: What's Covered Under Your 529 Plan
The biggest factor in whether or not an audit process will be smooth or bumpy is generally how organized you have been with your receipt collection. That’s right - unfortunately it’s back to shoebox storage here!
Make absolutely sure that your receipts add up to the amount of 529 funds you withdraw in any given year. You will need to prove that you spent all your 529 withdrawals from a given year on qualified expenses for you Beneficiary - if there is a different between what you withdrew and what you can provide receipts for, you may face large back-taxes and a 10% penalty!
One of the harder things about 529 expense eligibility is the fact that it isn’t just about what the product or service is, but whether the 529 beneficiary were themselves eligible. It is extremely important to have all documentation saved that can help support the case your Beneficiary was enrolled (at least half time) and in the right course. For example, the IRS may ask for additional details on which courses the Beneficiary was enrolled in, particulalry if there were particulalry high cost expenses attributed to a course.
This makes it really important to keep all enrollment and completion related documents, including:
If all this sounds like a lot to handle then you might be excited to learn Backpack has built a solution to help. 529 Purchase Protection is an eligibility verification and protection service where we certify your submitted expenses as eligible, store the appropriate documentation for easy use in the event of an audit. We even cover any taxes and penalties imposed on you in the case the IRS disagrees with us!
Learn more and sign up for 529 Purchase Protection on our website.
Disclaimer:This article is for informational purposes only and does not constitute legal or financial advice. For specific advice regarding your situation, please consult a professional advisor.