How to show 1099-Q distribution from 529 is nontaxable to avoid IRS letter?

[puravidapto]

Suppose John received 1099-Q distribution from 529, further suppose the distribution is fully used for qualified education expense (room and board for example) of someone who is not a dependent (divorced or grand child). Since there is no place on form 1040 to show the total distribution was used for qualified education expense, what should John do to avoid IRS audit letter?

[TaxGuyBill · Accepted solution]

As of now, I don't think anything can be done.  Tell the taxpayer that there likely will be an IRS notice, and you can even prepare a response to the IRS now, so the taxpayer can send that response to the IRS when they get that notice.

[abctax55]

I agree with Bill about warning the client of possible (future) IRS correspondence.  I also document the expenditures in a statement that goes with the return (not that the IRS will read it....).  Then I can just print, attach to the notice when it comes, and mail.  

[puravidapto]

I think this is a flaw in the current filing process, how about the following workaround? Suppose you received 10,000 distribution all of which are used for qualified education purpose, but you report that 9,999 are used, this way you report the distribution and will not likely to get an IRS letter. In the future, there should be a process similar to HSA which you file a form even all the distribution are used for qualified medical purpose.