Sorry, I admit that I asked this before but it's STILL not clear to me that there is nothing that I have to file with regard to Form 1099-Q for withdrawals from a 529 Plan.
This whole thing is new to me. My daughter enrolled in Expensive U back in August 2008. I paid for both freshmen semesters in 2008, including room and board. I got a 1099-Q from the Pennsylvania 529 plan that I withdrew money from. The 1099 shows about $50,000 withdrawn. I spent probably $55,000 of qualified expenses so there is no tax due. My basis was about $25,000 as I've been in the plan for a long time and it's a "prepaid" type plan that does not spank me for the equity price crash.
My question is this: It appears from Turbotax that there is no reconciliation on the actual tax return. Once Turbotax is satisfied that the qualified costs paid exceed the gain on the withdrawal, nothing further happens. (Although if I play with it and make the expenses LESS than the gain on the withdrawal, it does show tax due on Form 1040).
How does the IRS know that I actually spent more than the potentially taxable withdrawal amount? If they get a 1099-B, the burden is on me to show the Schedule D transaction and prove what's due or not due. Otherwise they assume that the entire 1099-B amount is taxable. If they get a 1099-MISC, the burden is on me to prove what's self- employment income, again otherwise they assume the entire amount is taxable. But it appears if they get a 1099-Q, there is no burden of proof required on the tax return. Yes, I understand if I get audited I'll owe taxes and perhaps interest and penalties if I don't report the income and don't have enough qualified expenses to cover it.
Am I right about this? Is there no further reconciliation required....does the IRS really assume that the 1099-Q is at least the amount spent on qualifying expenses and that no tax is due? And the burden is only on me to show if it is more and tax actually is due?
Seems counter intuitive to every other Form 1099 situation and certainly not in the IRS interest. Furthermore, why require 529 Plans to file a 1099 with the IRS at all if the IRS doesn't reconcile automatically reconcile this like they do with other 1099 situations? Certainly there are lots of instances where taxes are due from taxpayers and there is no 1099 for the IRS to check against, yet the taxpayer is still obligated to pay tax due. Why not eliminate the 1099- Q if there is no automatic computer matching against the tax return?