Q. Given that IRS has a copy of the 1099-Q , how does IRS know that none of this $9646 is not taxable?
A. They don't. There is a risk of an IRS inquiry. But there's nothing you can do to prevent it. I tried and got an IRS inquiry anyway. I sent em a copy of the school statements. They went away. As stated earlier, When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. At least two users have reported receiving a CP2000 letter, from the IRS, on 529 distributions. They 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. We have noticed, here in this forum, that the number of 1099-Q notices, from the IRS has dropped off significantly in recent years.
Q. Also, how do I account for the $4029 in OOP expenses I paid to the college, in TurboTax?
A. You don't account for individual sources of educational funds. You account for the expenses, which you will have done, as described above. Not everything gets entered into TurboTax. Some info is kept in your backup records. You need to keep a copy of the above calculations, just in case.
