1099-Q IRS letter

[LeeLee7069]

I received a letter from the IRS stating I did not report accurately my 1099-Q information (they said I was low). I have looked back & everything matches up. What do I do now?  Also, I have read that you technically don't have to report qualified distributions, which mine are, so I am wondering why it is being looked at.  Very confused & could use your help.

[NCperson]

what did the IRS SPECIFICALLY ask you to do? 

[LeeLee7069]

They say I owe money, due in 1 month. I have checked my official 529 1099-Q end of year tax forms against what I entered into TurboTax, and all numbers match.   I am not sure where to go from here.

[Hal_Al]

You need to reply to the IRS that you had a qualified 529 plan distribution, The IRS has done a poor job: if you use all  your 529 money for qualified expenses (you say you have a qualified distribution), they don't make you fill out a form, showing that. By comparison, if you use all your HSA money for medical expenses, you have to fill out form 8889, to claim the exclusion.  There is no similar form for a 529 distribution.  So, there is no way for you to head off an IRS inquiry. 

So, yes,  people, here in the forum (including me),  have reported getting a CP2000 letter, from the IRS,  on 529 distributions. At least two replied that their child was in college and the distributions were for qualified expenses, which they listed, but they did not provide receipts.. They  later received a notices saying they were in the clear. In my case, I  provided copies of the school's billing statements and a copy of the TurboTax Student information worksheet. That satisfied the IRS.  You may want to also include the TT 1099-Q worksheets.  These worksheets were not part of you original tax return filing. 

[LeeLee7069]

After 1 hour of waiting for a representative, I was able to speak to someone. They said my letter was sent in error & they were going to cancel the letter. However, they said I reported part of the income as unqualified/taxable. I have no idea how that happened with the TurboTax software guiding me.  Now I have to amend the return.  All of this is very frustrating.  

[Hal_Al]

Q.  The IRS said I reported part of the income as unqualified/taxable. I have no idea how that happened with the TurboTax software guiding me?

A. Look at the student info worksheet and 1099-Q work sheet for the calculation of the taxable (non-qualified) amount. See this thread, for a general discussion on the taxable amount: 

https://ttlc.intuit.com/community/college-education/discussion/529-bug/01/2462587/highlight/false#M4...

There are three things you can do with your Qualified educational expenses (QEE):

1. Allocate then to scholarships (so that the scholarship remains tax free)
2. Use them to claim an education credit
3. Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable

TurboTax allocates QEE, in that order, until you tell it otherwise. TurboTax allocates QEE, in that order, but it doesn't do a very good job.  It's best if you have some idea of the outcome expected, when you make your entries. 

Q. Now I have to amend the return?

A. Yes.  If you know for sure that none of it is taxable, just delete the 1099-Q.