1. Yes, the 1099-Q is reported to the IRS.
2. Only the tax forms are going to the IRS. They already have the documents.
3. If all of the 1099-Q was used on 529 qualified Room and Board and Qualified Education Expenses - Internal Revenue Service then, a nontaxable transaction should not be entered. IRS Publication 970, Tax Benefits for Education states:
Page 45: Don't report tax-free distributions (including qualifying rollovers) on your tax return.
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