Regulations on Reporting Requirements for Education Tax Credits Proposed by IRS Student Loan Interest Reporting Covered. Comments Due September 14

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July  10, 2000

The long-awaited proposed regulations on information reporting for the Hope and Lifetime Learning tax credits and the student loan interest deduction, mandated by the Taxpayer Relief Act of 1997 (TRA97), have been published by the Internal Revenue Service. The notice of proposed rulemaking (NPRM) issued June 16 (Federal Register, page 37728) focuses on guidance to colleges and universities who receive tuition payments from individuals who may be eligible to claim the education tax credits, and to lenders who receive interest payments for qualified education loans. The proposed rules implement section 6050S of the Internal Revenue Code (Code). 

Under the proposed regulations, beginning in 2002 (for tuition payments received in 2001), institutions:

• will be required to include financial information on the Form 1098-T, "Tuition Payments Statement;" 
• will not be required to collect and report information on or to taxpayers who may claim students as dependents; 
• will not need to file Form 1098-T for individuals only taking noncredit courses, or for nonresident alien students unless requested; and,
• will be subject to the same requirements for filing on magnetic media and the same penalties that are in place for other information reporting requirements.

For more than two years, NACUBO has targeted much attention on the reporting requirements included in TRA97. An interassociation task force with more than 50 members, led by NACUBO, spent the first six months of 1998 analyzing the statutory requirements and developing processes to help institutions gear up for this massive new information reporting system. In addition, 670 colleges and universities responded to a lengthy NACUBO survey in 1999 on their experiences for the first year filing Form 1098-T, providing valuable data for discussions with policymakers.

The Task Force developed recommendations for regulatory action that NACUBO, with help from its members, and others have advocated with the IRS and Congress. Several priority issues identified by the Task Force-reporting on and to parents, exemption for continuing education students, and reporting on nonresident aliens only on request-have been addressed favorably in the proposed regulations. While this does not mean that the proposed regulations are perfect, it illustrates the value of colleges, universities, and the associations that represent them, working together to influence federal actions. NACUBO is grateful to the many individuals and institutions who participated in these efforts, and thanks in advance those who will continue to do so.

This report provides an overview of the NPRM, highlighting issues of concern to colleges and universities. Part I addresses the 1098-T reporting requirements related to the education tax credits and Part II covers the reporting of student loan interest payments on Form 1098-E. Part III addresses a brief provision in the notice on magnetic filing of returns. The complete Federal Register notice is reprinted at the end. The NPRM, the statutory language, and other information on the Hope and Lifetime Learning tax credits and the student loan interest deduction are also available on NACUBO's TRA97 Resource Page on the Web at www.nacubo.org/Web site/tra97. 

The proposed regulations do not stand alone, but are integrally related to two other NPRMs that were issued in January 1999. NACUBO Special Action Report 99-1 (January 28, 1999) covered proposed rules issued by the IRS on the education tax credits under Code section 25A. That notice includes, for instance, the definition of qualified tuition and fees and discussion of refunds. Proposed rules implementing Code section 221, the student loan interest deduction, were the subject of Special Action Report 99-2 (February 12, 1999). Both reports are available at the Web address noted above.

The deadline for comments on the proposal is September 14. NACUBO strongly encourages its members to review the NPRM, discuss it with other members of the campus community who are involved in the reporting effort, and submit comments to the IRS. Details on providing comments are provided at the end of the report.

Part I. Form 1098-T Reporting Related to Education Tax Credits
§1.6050S-1. Information Reporting for Payments and Reimbursements or Refunds of Qualified Tuition and Related Expenses.

Any college or university that receives payments of qualified tuition and related expenses (as defined in Code section 25A(f)(1)) from any source for any calendar year, or that makes reimbursements or refunds of such payments must: 1) file a Form 1098-T information return with the IRS with respect to each person on whose behalf payments were made; and 2) furnish a similar statement to each person on whose behalf payments were made.

Under the proposed rules, these reporting requirements do not apply to two categories of students:

• any individual who is a nonresident alien during the calendar year, unless the individual asks that a 1098-T be filed; and
• any individual who is enrolled during the calendar year only in courses for which the individual receives no academic credit.

The NPRM defines academic credit as "credit awarded by an institution for the completion of coursework leading toward a postsecondary degree, certificate, or other recognized postsecondary educational credential."

These exemptions were first provided in IRS Notice 98-59 for reporting on tax years 1998 and 1999, and subsequently extended to 2000, in response to requests from NACUBO and other higher education representatives. It is important to note this provision exempts institutions from reporting on these students, but does not affect their eligibility for tax benefits. Continuing education students may still be eligible to claim a Lifetime Learning tax credit, but do not need a 1098-T to substantiate their claim (a receipt from the institution or similar documentation would be sufficient).

Form 1098-T Reporting. Institutions are required to file an information return with the IRS for each person on whose behalf tuition payments were made or to whom refunds were made during the calendar year. Form 1098-T, "Tuition Payments Statement" or a substitute form may be used.

The following information must be included on the return (existing reporting requirements appear in regular type, new proposed rules appear in bold-faced type):

• the name, address, and taxpayer identification number (TIN) of the institution;
• the name, address, and TIN (social security or individual taxpayer identification number) of the individual with respect to whom qualified tuition payments and reimbursements or refunds were made;
• the aggregate amount of payments of qualified tuition and related expenses received from any source on behalf of the individual during the calendar year;
• the aggregate amount of reimbursements or refunds paid to the individual during the calendar year; and
• the aggregate amount of any scholarships or grants that were processed by the institution during the calendar year for the payment of the individual's costs of attendance;
• an indication whether the student was enrolled for at least half-time for the course of study he or she is pursuing for at least one academic period during the calendar year; and
• an indication whether the student was enrolled in a program leading to a graduate-level degree, certificate, or other graduate-level educational credential.

In crafting the proposed regulations, the IRS decided against imposing the statutory requirement that institutions report the name, address, and TIN of parents or other taxpayers who will claim students as dependents on their federal income tax return, as well as the requirement to furnish statements to these taxpayers. A paragraph in the proposed regulations has been designated as "reserved" for this provision, but no rules were proposed to implement it. NACUBO and others have argued strongly against requiring institutions to collect and provide information on taxpayers who claim students as dependents. At the time the legislation was passed, we were told that IRS data systems could not match information based on dependents' TINs. IRS has been upgrading its computer systems and may have efforts underway to develop this capability. 

The IRS also has not proposed a stricter requirement for reporting the academic level attained by the student, choosing to keep the current provision that asks institutions to identify students who are enrolled in graduate-level programs. Although the Hope tax credit is only available for students in the first two years of postsecondary education, the proposed rule appears to acknowledge the difficulty for institutions in making this determination based on their student information systems. Colleges and universities should be prepared, however, to respond to questions about students' status as they will need the information to file their returns. (See §1.25A-3(d)(iii) in the proposed regulations on the Hope and Lifetime Learning credits under Code section 25A.)

Timing.

Form 1098-T must be filed on or before February 28 (March 31, if filed electronically) of the year following the calendar year in which payments were received, or reimbursements or refunds were made.

Reporting on Nonresident Aliens. While institutions are not required to file a return for nonresident alien students, if a nonresident alien student requests the institution to report, the institution is required to do so on or before the filing deadline, or within 30 days of the request, whichever is later. A statement must also be furnished to the requesting individual in accordance with the following rules.

Statements to Students. In addition to filing the information return with the IRS, institutions must also provide a statement to each student for whom they are required to file a Form 1098-T, including the following information:

• all of the information that appears on the individual's Form 1098-T; 
• a legend that identifies the statement as important tax information that is being furnished to the IRS;
• a statement that the taxpayer may not be able to claim an education tax credit;
• a statement that the amount of any scholarships, grants, refunds, or reimbursements reported for the year and similar amounts not reported (because they are not processed by the institution) may reduce the amount of any allowable tax credit for the taxable year or a prior taxable year;
• statement referring the taxpayer to relevant IRS forms and publications for explanations about eligibility requirements for, and calculation of, any allowable tax credit; and 
• the name, address, and telephone number of the individual who is the information contact for the institution.

Timing and Manner of Furnishing Statements to Students

Institutions must furnish statements to individuals on whose behalf tuition payments were received on or before January 31 of the year following the calendar year in which payments were received or reimbursements or refunds were made. If mailed, the statement must be sent to the student's permanent address. If the permanent address is not known, the statement may be mailed to the student's temporary address. Institutions may provide individuals with either a copy of the Form 1098-T and its instructions or a substitute document, provided that all the information filed with the IRS is included as well as the information required by the regulations (listed above).

Determining Amounts to be Reported.

With the NPRM resolving several potential difficulties for institutions, the most challenging requirement in the proposed rules for most colleges and universities will be reporting aggregate financial data on payments, grants, and refunds and reimbursements. A NACUBO survey conducted after the first year that institutions were required to file Forms 1098-T, found that 58 percent had supplied some financial information to students (even though it was not required). Most provided detailed information on payments and grants, rather than aggregates. Institutions will still be free to provide additional detail to students, but under the proposed regulations they will have to provide aggregate amounts to the IRS. The proposed rules, under §1.6050S-1(d), attempt to address a couple of sticky issues. 

The misalignment of the tax year and the billing cycle used by many colleges and universities is addressed in §1.6050S-1(d)(1)(i) and in a subsequent example. In determining the aggregate amount of payments of qualified tuition and related expenses to be reported, the proposed regulation states that:  payments received with respect to an individual during the calendar year from any source (except for any scholarship or grant that, by its terms, must be applied to expenses other than qualified tuition and related expenses, such as room and board) will be treated a payments of qualified tuition and related expenses up to the total amount billed by the institution for such expenses. 

This section of the NPRM should be analyzed in conjunction with the rules proposed last year under Code section 25A, especially proposed §1.25A-5, "Special rules relating to characterization and timing of payments." It is important to remember that the earlier proposed rules are focused on requirements for the taxpayer, not the institution. The IRS generally understands and accepts that there will be differences between amounts reported on information returns and those used by taxpayers on their tax returns. 

Third-Party Servicers.

The IRS has also addressed the common practice of institutions using a tuition payment plan operated by a third party. Under §1.6050S-1(d)(2), if a college or university contracts with a third party to receive or collect tuition payments on its behalf, that entity must satisfy the information reporting requirements, provided the institution furnished the information necessary for the third-party servicer to comply. If the institution fails to provide the requisite information to the third party, the institution must satisfy the reporting requirements.

Penalties. 

During the phase-in of the reporting requirements, institutions have been exempt from the usual penalties associated with information returns as long as a good faith effort was made to comply. The proposed rules clarify that these penalties, which can be as high as $50 per form with a maximum of $250,000, will apply to Form 1098-T filings in the future. Failure to file correct returns with the IRS, including returns with incomplete or incorrect information, on or before the required filing date may result in penalties under Code section 6721. Failure to furnish correct information statements to students, including incomplete or incorrect information, may result in section 6722 penalties. Note that these penalties can be significantly higher in cases of intentional disregard of the filing requirements.

Waiver of Penalties.

In instances where an institution has failed to provide a correct TIN on Form 1098-T or a related statement, penalties may be waived if the failure is due to reasonable cause. To demonstrate reasonable cause, an institution needs to establish that the error arose from events beyond the institution's control, such as a failure of the individual to provide an accurate TIN. The institution must be able to show that it acted in a responsible manner both before and after the failure. 

According to the NPRM, the institution will be considered to have acted in a responsible manner if it takes the following steps:

• If the institution does not have a correct TIN for a student, it must solicit the TIN at least once during the calendar year during which it receives payments from, or makes reimbursements or refunds to, the individual.
• The institution must request the student's TIN in writing and must clearly notify the individual that the law requires him or her to furnish a TIN so that it may be included on an information return filed by the college or university.
• The institution must notify the student that his or her failure to provide a TIN to the institution may result in a $50 penalty being imposed against the individual as authorized by law.

A request for a TIN made on Form W-9S, "Request for Student's or Borrower's Social Security Number and Certification," will satisfy these requirements. Institutions may set up systems for individuals to submit Forms W-9S electronically, develop a separate form to collect TINs, or incorporate the request into existing forms used by the institution, such as financial aid applications.

Effective Date.

The NPRM states that the proposed reporting rules will apply to returns and statements filed after December 31, 2001. These would cover tax year 2001 and due to students by January 31, 2002, and to the IRS by February 28, 2002. According to the preamble to the NPRM, taxpayers may rely on the proposed regulations pending the issuance of final regulation.s This means that, barring intervening IRS action, institutions will need to comply with the rules as proposed for tax year 2001 reporting, even if final rules have not been issued. Therefore, campus systems involved in capturing and reporting individual student financial data will need to be ready as early as possible next year. The proposed effective date may be troublesome for some colleges and universities. 

Part II. 
1098-E Reporting Related to Student Loan Interest 
§1.6050S-2 Information Reporting for Payments of Interest on Qualified 
Education Loans.

According to the NPRM, any entity (lender) that, as part of a trade or business, receives interest payments on qualified education loans totaling $600 or more from a single payor (borrower) during a calendar year must file an information return with the IRS with respect to the borrower and furnish a statement to the borrower. 

Reporting Period.

The reporting requirements only apply to student loan interest payments made by the borrower during the first 60 months of repayment of the loan. The 60-month period begins on the date the qualified education loan first enters repayment status and ends 60 months later. This date is determined either by the loan agreement, or in the case of a federal loan program, under federal regulations. 

In cases where the lender knows or has reason to know about any periods of deferment or forbearance which would suspend repayment (in the first 60 months), then the 60-month initial repayment period is extended by the length of time of such deferment or forbearance.

Efforts to get Congress to amend Code section 221 to eliminate the 60-month limit on the student loan interest deduction have so far been unsuccessful despite widespread agreement in the higher education and lender communities, and in the Clinton administration, that the limitation adds considerable complexity to the provision while resulting in minimal cost savings to the government.

Transition Rules.

For qualified education loans made prior to January 1, 1998, and if the lender does not know or have reason to know the date on which the loan entered into repayment, or the default date, then, for reporting purposes only, the 60-month period begins on January 1, 1998.

Form 1098-E Reporting. Lenders are required to file an information return for each borrower who made payments of interest totaling $600 or more during the calendar year. Lenders may use Form 1098-E, "Payments of Student Loan Interest" or a substitute form.

The following information must be included on the return:

• the name, address, and TIN of the lender;
• the name, address, and TIN of the borrower;
• the aggregate amount of interest payments received during the calendar from the borrower; and
• any other information required by Form 1098-E and its instructions.

Timing.

Form 1098-E must be filed on or before February 28 (March 31 if filed electronically) of the year following the calendar year in which interest payments were received. 

Statements to Borrowers. In addition to filing the information return with the IRS, lenders must also provide a statement to each borrower for whom they are required to file a Form 1098-E, including the following information:

• all of the information included on the Form 1098-E;
• a legend that identifies the statement as important tax information that is being furnished to the IRS;
• instructions that the borrower may not be eligible to deduct the full amount of interest reported on the statement;
• a statement that interest payments are deductible only during the first 60 months that interest payments are required; 
• a statement that for loans made prior to January 1, 2002, for which the lender does not report payments of interest other than stated interest, the borrower may be able to deduct additional amounts not reported on the statement, such as certain loan origination fees and capitalized interest;
• a statement that the borrower should refer to relevant IRS forms and publications for explanations relating to the eligibility requirements for and calculation of any student loan interest deduction; and
• the name, address, and telephone number of the individual who is the information contact for the lender filing the Form 1098-E.

Timing and Manner of Furnishing Statements to Borrowers.

Lenders must furnish statements to borrowers on or before January 31 of the year following the calendar year in which payments of interest on a qualified education loan were received. If mailed, the statement must be sent to the borrower's last known address. Lenders may provide borrowers with either a copy of the Form 1098-E and its instructions or a substitute document, provided that all the information filed with the IRS is included as well the information required by the regulations (listed above).

Special Rule for Origination Fees and Capitalized Interest.

For qualified education loans made prior to January 1, 2002, a lender is not required to report payments of loan origination fees and capitalized interest as interest under Code section 6050S and these rules.

Certification of Qualified Education Loans.

If a loan is not subsidized, guaranteed, financed, or is not otherwise treated as a student loan under a program of the federal, state, or local government or an eligible educational institution, a lender must request a certification from the borrower that the loan will be used solely to pay for qualified higher education expenses. Lenders may use Form W-9S to obtain the certification. If a lender does not receive such certification from the borrower, the loan will not be considered a qualified education loan, and therefore the borrower will not be eligible to deduct interest paid.

Third-Party Servicers.

If the lender contracts with a third party to collect loan payments on its behalf, that entity must satisfy the reporting requirements, provided the lender furnished the information necessary for the third-party servicer to comply. If the lender fails to furnish the requisite information to the third party, the lender must satisfy the reporting requirements.

Penalties.

The same penalty and waiver rules set forth with respect to 1098-T reporting on page five of this report, apply to 1098-E reporting, including the lender's duty to show that it acted in a reasonable manner in collecting the information required.

Effective Date.

The proposed reporting rules apply to returns and statements filed after December 31, 2001. 

Part III. Magnetic Media
§301.6011-2 Required Use of Magnetic Media

Under the interim rules in effect for 1998, 1999, and 2000, the rules that generally apply concerning the format used to file information returns with the IRS did not apply to Forms 1098-T and 1098-E. The NPRM would make the same rules governing the filing of W-2s, 1099s, and other 1098s apply. Institutions and lenders who are required to file 250 or more Forms 1098-T or 1098-E must file on magnetic media. Magnetic media is defined as any media allowed under applicable regulations, revenue procedures, or publications, including magnetic tape, tape cartridge, diskette, and electronic filing. IRS Publication 1220 provides the rules for formatting and filing these information returns.

Comments.

NACUBO strongly encourages its members to submit comments to the IRS on any of the proposed provisions that are problematic. Be specific about why your institution would have difficulty complying or what is confusing, how your processes operate, and how the provision could be improved. Illustrative examples are often useful in clarifying regulations-suggest one. Of course, it is also appropriate to let the IRS know if you support an approach taken in the proposed regulations. 

Areas to consider commenting on include:

• provision of aggregate data on payments, grants, and refunds;
• the absence of guidance on how refunds should be reported; and
• the exemption for continuing education students applies to students only taking noncredit courses.

Members are also encouraged to share their concerns with NACUBO's Public Policy and Management Programs Department. Staff will work with NACUBO's Taxation Council and other representatives of the higher education community to prepare comments on behalf of its members. While copies of comments filed by members are very useful to NACUBO, learning about members concerns earlier in the process-in a less formal way-will have greater impact on our work. Contact information for Mary Bachinger is provided below.

There are two opportunities to provide comments on the proposed regulations. Most importantly, comments should be filed with the IRS by September 14. A public hearing will be held on the proposed regulations upon request and persons outside the Washington, DC area who wish to testify at the hearing may request that the IRS videoconference the hearing to their sites. Requests to videoconference the hearing to other sites must be received by August 15. The IRS will publish the time and date of the public hearing and locations of any videconferencing sites in the Federal Register.

Send submissions to:

CC:DOM:CORP:R (REG-105316-98), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Comments may also be submitted electronically on the Internet by selecting the "Tax Regs" option on the IRS Home Page, or by submitting comments directly to the IRS Web site at www.irs.gov/prod/tax_regs/comments.html.

Under the Paperwork Reduction Act, comments on the collection of information (which encompasses most of this notice) and the burden imposed may also be sent to the Office of Management and Budget. The deadline for submitting comments to OMB is August 15. See page 37729 of the Federal Register notice for details.

Information Contacts:

For additional information about the NPRM, contact Donna Welch at the IRS at 202-622-4910. For questions about the submission of comments, the hearing, or to be placed on the building access list to attend the hearing, contact Guy Traynor at 202-622-7180.

For the latest information on regulatory developments related to the information reporting requirements, institutions should check the NACUBO TRA97 Resource Page on the Web at www.nacubo.org/Web site/tra97.

The NACUBO contact and author of this report is Mary M. Bachinger, senior policy analyst, Public Policy and Management Programs. She can be reached by telephone at 202-861-2581 or by E-mail at mbachinger@nacubo.org.
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(c)2000 NACUBO. This report is distributed only to primary representatives of NACUBO member institutions and subscribers; this is the only copy your organization will receive. This report may be reproduced for internal distribution. All other unauthorized uses are strictly prohibited. For information, write to the National Association of College and University Business Officers, 2501 M Street, N.W., Suite 400, Washington, DC 20037-1308, or call 202-861-2500.

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