Susan Tompor: FAFSA headaches might ease as online IRS tool returns

FAFSA headaches might ease as online IRS tool returns

Filling out the FAFSA for financial aid is always a headache, but things got worse earlier this year after ID thieves forced the Internal Revenue Service to shut down an online tax tool that made it easier for families to report their income.

Now, the question remains: What happens next? 

The time to tackle the paperwork for financial aid for the 2018-19 school year kicks off Oct. 1.

The good news is that filling out the Free Application for Federal Student Aid should be less stressful once the IRS Data Retrieval Tool returns Oct. 1. The IRS cut off access in March after realizing the tool was proving to be way too useful to ID thieves engaging in tax refund fraud.

But some key changes are being made to address security issues. Under the new system, some families will need to make certain adjustments, particularly if they're a dual-income married couple, if they filed an amended tax return or the family had a direct IRA rollover into another retirement account.

"Last year, we had a real mess on our hands when the IRS shut down the data exchange," said Pam Fowler, executive director of financial aid at the University of Michigan.

The IRS retrieval tool was designed to make it easy to shift income-tax data onto the FAFSA form and onto forms involving applications for income-driven repayment plans. One needs to file a FAFSA to obtain federal student loans and other aid.

Parents and students who filed their FAFSA before the IRS problems were able to breeze through parts of the process.

But other parents and students ran into roadblocks when the tool was no longer available. Some ended up rushing to obtain an IRS tax return transcript or a verification of non-filing status for those not required to file a return.

Fowler said the IRS was not prepared for the onslaught of such requests and many families were unable to get these forms before a school's deadline, often at the end of March or April.

Students who meet the deadline are assured of getting aid for which they are eligible. But after the deadline, some aid, such as federal work-study, could be depleted.

"The fact that the IRS Data Retrieval Tool is coming back up Oct. 1 is going to be a big help for students and families trying to complete their financial aid applications," said Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators.

Families can use the online tool to import data from their 2016 tax return when applying for aid for the 2018-19 school year. More than 19.2 million FAFSA forms were processed in fiscal 2016.

But extra security measures are being put in place after ID thieves reportedly used the IRS’s tool to look up "adjusted gross income" on people's tax returns.

IRS Commissioner John Koskinen testified before the Senate Finance Committee in early April that information for up to 100,000 taxpayers may have been put at risk as hackers  posing as students used the online tool to apply for financial aid.

The ID thieves —who may have had other  information in advance — would start a financial aid application and then give the IRS permission to automatically fill out the aid form with tax information.

Armed with someone's AGI, the thieves would be able to unlock more information about a filer's previous tax return. Then the crooks would use the information to file a better-crafted fraudulent return and tap into possible tax credits to inflate a refund.

Scammers typically file fake tax refunds earlier in the year to beat legitimate taxpayers to the punch. When the real taxpayer files, the first clue that there has been ID fraud may be that the real filer's own electronically filed return is rejected.

Fraud rings often have fraudulent refunds deposited onto prepaid cards that they control.

Koskinen said then that about 8,000 fraudulent refunds were issued relating to such security breaches connected to the retrieval tool, totaling $30 million. But thousands of other illegal refunds were stopped before being issued.

In June, two men were charged in federal court in Indianapolis involving the theft of more than $12.6 million from the U.S. Treasury in a scheme to use stolen information to file false tax returns with the IRS from March 2014 through March 2016.

Now, new encryption protections have been added to the Data Retrieval Tool to better protect taxpayer information. Parents and students will be able to access the IRS Data Retrieval Tool at www.fafsa.ed.gov and StudentLoans.gov

In June, the U.S. Department of Education said the tool was partially back online for college graduates and others seeking income-driven repayment plans.

FAFSA filers will have access to the tool and see some changes beginning in the fall, according to the department of education.

As part of the process, you won't be able to see exact income numbers from your tax returns showing up on the FAFSA. Instead, you'd see the words "transferred from the IRS" in data entry fields on the online FAFSA and student aid report.

The numbers essentially are "masked" from the applicants. It's hardly a settling solution for many families who are worried about qualifying for financial aid. You'd want to knowwhether you're reporting $50,000 in income or $250,000 in income.

Draeger said financial aid officers are concerned that a better longer-term solution could  be needed to reassure families that the correct income is being imported. But he said if this is the best short-term solution, it will have to do for now.

Michelle Rhodes, associate vice president for financial aid at Grand Valley State University, which has its main campus in Allendale, west of Grand Rapids, said it's going to be important to communicate the changes to parents so they won't be shocked when they don't see the actual numbers.

Overall, though, she does not expect people will have problems using the IRS tool.

"We're just glad it's back," Rhodes said.

Mark Kantrowitz, publisher and vice president of strategy for Cappex.com, said it continues to be worthwhile to use the IRS tool.

The data is coming directly from your tax return, he said. So you're not making typos or other mistakes that could take place if you choose to fill out the form without importing data from the data retrieval tool.

Kantrowitz noted that using the data retrieval tool can help families avoid being selected for a more cumbersome verification process in the future where even more back up documentation would be required.

Some important points to understand as part of the new process when using the data retrieval tool:

1. Dual-income parents need to make adjustments.

Married couples who both earn paychecks will be able to use the data retrieval tool but they will need to take a few extra steps relating to their earnings. Taxpayers who file a married filing joint return, for example, will need to submit their earned income information from their W-2 forms manually, Kantrowitz said.

2. Corrections could require more work.

Students and parents will no longer be able to make corrections on their own to transferred data. So if a parent or student filed an amended tax return, they'd need to provide a copy of that amended return to the college's financial aid office, Kantrowitz said.

3. An IRA rollover triggers extra steps.

Extra care needs to be taken so that your income is not inflated if you rolled over money from one IRA to another.

For financial aid, a direct rollover should not counted as part of one's income. You don't want to inflate your income if you rolled over say $40,000 from one retirement account to another in a year.

So, you'd need to know how much money was rolled over into a new account and enter that information appropriately when completing the FAFSA.

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Contact Susan Tompor: stompor@freepress.com or 313-222-8876. Follow her on Twitter @Tompor.

© 2017 Detroit Free Press


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