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NIH Loan Repayment Programs: Guidelines for Tax Reimbursement Requests (revised February 2007) |
The purpose of these guidelines is to provide an understanding of the benefit of tax reimbursement that is provided by the National Institutes of Health (NIH) Loan Repayment Programs (LRP). The benefits provided by the LRP are taxable. The reporting of LRP income increases participants' Federal income tax (before LRP-provided withholding is considered) and may result in increased state and local taxes. The LRP strives to eliminate the increased tax burden of its participants. Participants and their professional practitioners should apply these guidelines in connection with their preparation of a tax reimbursement request.
Tax reimbursement requests must be submitted to the NIH Division of Loan Repayment (DLR) by September 30th following the tax year for which additional Federal and/or increased state/local taxes were incurred as a result of reporting LRP income. The deadline will not be extended. Before submitting your tax reimbursement request documents, please ensure you have included all the required elements (see below checklist). Do not submit your request to DLR until all required elements are included in your package.
Please mail your request to:
NIH Division of Loan Repayment
Attention: Joseph Seifner
6011 Executive Boulevard, Suite 206
Bethesda, Maryland 20892-7650
Requests should be sent to DLR via U.S. mail or delivery service instead of fax or email to minimize the risk that the documents will be inadvertently received by an unintended party. Please allow 5-7 business days from the date your documents are delivered for the DLR to acknowledge its receipt of your request.
The DLR conducts audits of participant tax reimbursement requests to ensure the requested amounts are valid and accurate. The audit methodology involves the computation of separate estimates of additional increased Federal and increased state/local taxes that result from the reporting of LRP income. The DLR's goal is to complete the audit and release approved payments within 45 days and 60 days, respectively, of the date a request is determined as fully compliant with the submission requirements highlighted in the following checklist and described in greater detail in the section entitled "Elements of a Tax Reimbursement Request".
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TAX REIMBURSEMENT REQUEST CHECKLIST
* Be certain your submission contains the following: |
Participant Request --
Statement signed by the LRP participant that cites the amount of increased federal and state taxes incurred due to the LRP, and refers to the name of the taxing state and/or localities;
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Tax Practitioner Statement --
An analysis prepared by a CPA, tax attorney, or Enrolled Agent (a tax practitioner licensed by the IRS), which supports the Participant's Request by providing a summary of the increased taxes that follows the format prescribed in these guidelines;
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Tax Returns -- Signed copies of the participant's complete (all schedules & supporting statements) Federal and state/local tax returns; |
Mock Tax Returns --
Participant's pre-LRP Federal and state/local tax returns that excludes LRP income and withholding; and |
Invoice/Receipt --
Document from a professional licensed tax practitioner that specifies their fee for performing LRP-related analysis. (optional, supports reimbursement of such fee up to maximum of $100)
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Elements of a Tax Reimbursement Request
Participant Statement -
A written statement signed by a participant asserting/claiming that the income reported by the NIH due to their participation with the LRP had resulted in (1) an increase in their Federal taxes by an amount greater than the LRP-provided Federal tax payments, (2) an overpayment of their Federal taxes, where the LRP-provided Federal tax payments was greater than their Federal increased taxes, and/or (3) an increase in their state/local taxes. When the requested tax reimbursement is solely for increased state/local taxes, the statement must indicate the amount of any Federal overpayment as an offset from the amount of increased state/local taxes.
The participant statement may also indicate the amount of a fee paid or payable, up to the $100 maximum available for such reimbursement, to professional licensed tax practitioner for services associated with their assessment of the participant's tax returns to determine the amount of a LRP related tax reimbursement request. The participant's statement should show the different components of the reimbursement being requested in the following format:
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| Requested Reimbursement |
Increased state taxes (excludes interest & penalties)
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$ XXXXX |
Additional Federal taxes (overpayment)
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$ XXXXX |
Total requested tax reimbursement
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$ XXXXX |
Professional tax practitioner fee (optional)
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XXX |
Total requested reimbursement
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$ XXXXX |
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If the reimbursement request includes an amount for increased
state/local taxes, the statement shall indicate the name of the state(s) and any taxing local jurisdiction(s) in which the
participant had residency or for which the participant was
otherwise required to file an income tax return (e.g., as
non-resident). The statement should indicate the dates of any
interstate moves by the participant during the calendar year
applicable to the tax returns being submitted to DLR, and
should name the state(s) in which the participant had
residency during that year.
Approved reimbursements of additional increased Federal taxes, increased state/local taxes, and applicable practitioner fee are subject to being offset by either a Federal tax overpayment or a prior year's excess Federal overpayment. Instances of an excess Federal overpayment are communicated to participants via letter prepared by DLR that informs the participant they may carry forward the excess overpayment to a future tax reimbursement request. The participant's statement should reflect as an offset the amount of an identified excess Federal overpayment that was carried forward from a prior year.
Practitioner Statement -
A written statement made by a licensed CPA, tax attorney, or Enrolled Agent that indicates they had assessed or analyzed the participant's Federal and state/local income tax returns and determined the amount of increased taxes that were incurred by the participant due to their LRP participation. The practitioner should subtract from the amount of increased Federal taxes the amount of Federal tax payments provided by LRP on behalf of the participant. If a negative number results, this must be clearly labeled as a Federal tax overpayment. Where a request is only for reimbursement of increased state/local taxes, the written participant and tax practitioner statements must provide the amount of the Federal tax overpayment.
The statement must be prepared on the official letterhead of the practitioner and signed by the licensed practitioner who performed the assessment. A signing CPA or tax attorney must hold an active license issued by a state licensing board and a signing Enrolled Agent must have an active license issued by the Internal Revenue Service (IRS). The applicable license must be active at the time the statement is prepared. A tax practitioner who is related to a participant by blood or marriage is not eligible to perform an assessment or prepare a statement in support of a tax reimbursement request for that participant.
Licensed CPAs should be registered with their State Board of Accountancy. To locate a CPA, you can do an online search via the applicable state's professional licensure webpage that is linked to its Board of Accountancy
webpage available at http://www.aicpa.org/yellow/ypsboa.htm.
Licensed Enrolled Agents are likely to be found at organizations specializing in preparing tax returns. Participants can conduct an online search for an Enrolled Agent via the National Association of Enrolled Agents membership directory available at: http://www.naea.org/memberportal/resources/fortaxpayers/agentsearch.htm.
The statement should summarize the assessment and computations that determined the exact amount of (1) additional increased Federal taxes or Federal tax overpayment after subtraction of LRP-provided Federal tax payment, and (2) increased state/local taxes. The summary should include a comparison of actual and pre-LRP taxes based on "mock" Federal and state income tax returns prepared by the practitioner (see Other - Student Loan Interest later in these guidelines for information on determining the appropriate amount of student loan interest to be deducted on certain mock Federal tax returns). The following provides a suggested format:
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| Summary of Tax Differential |
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Actual |
Pre-LRP |
Difference |
| Federal: |
| Adjusted Gross Income |
$ XXXXX |
$ XXXXX |
$ XXXXX |
| Taxable income |
$ XXXXX |
$ XXXXX |
$ XXXXX |
| Federal Tax* |
$ XXXXX |
$ XXXXX |
$ XXXXX |
| State: |
| Taxable income |
$ XXXXX |
$ XXXXX |
$ XXXXX |
| State Tax* |
$ XXXXX |
$ XXXXX |
$ XXXXX |
| *Excludes interest charges or penalties |
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| Amount of Reimbursement |
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Federal Tax |
State Tax |
| Actual Taxes (as filed) |
$ XXXXX |
$ XXXXX |
| Mock taxes (without LRP income) |
XXXXX |
XXXXX |
| Difference Due to LRP Income |
$ XXXXX |
$ XXXXX |
| Less: Federal tax payments by LRP |
(XXXXX) |
( - ) |
| Requested Reimbursement/(Overpayment) |
$ XXXXX |
$ XXXXX |
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Copies of Tax Returns - Participants must submit to DLR a copy of their complete Federal income tax return that they had signed and filed with the IRS and copies of their applicable state/local income tax return(s) they had signed and filed. The copies should include all pages (schedules and supporting statements) that were actually filed. The participant's signature must appear on the tax returns.
Participants who file Form 1040 electronically and provide the IRS a signed Form 8453 "U.S. Individual Income Tax Declaration for an IRS e-file Return" or 8453-OL "U.S. Individual Income Tax Declaration for an IRS e-file On-Line Return" must include a copy of the applicable signed Form 8453. Form 8453 authenticates the electronic portion of an e-filed Form 1040 and provides consent for direct deposit of a refund or authorization for an electronic funds withdrawal for payment of tax liability or estimated taxes. As such, DLR will accept a signed Form 8453 with an unsigned copy of Form 1040, and any equivalent signed declaration required for electronically filed state taxes along with an unsigned copy of the state income tax return.
Participants who e-file Form 1040 and/or a state tax return using a paperless process (e.g., Self-Select PIN Method), which eliminates the requirement for Form 8453 or state equivalent, must sign the copies of their tax returns submitted to DLR specifically for the purpose of the tax reimbursement request. The signature pages should be dated when signed rather than using the date e-filed.
Mock Returns – Participants reporting either a student loan interest deduction (Line 33) or alternative minimum tax (Line 45) of Form 1040 must also submit Federal and state "mock" (pre-LRP) income tax returns having the all the applicable schedules and supporting statements. The mock federal return should exclude your LRP income from line 21 and the LRP-provided withholding from line 64, and do not need to be signed. Their mock state/local tax returns should exclude LRP income. Participants who self-prepare their returns using software or a web application should simply remove their LRP income and withholding and re-save the files using new names to create mock tax returns.
Copy of Practitioner Invoice/Receipt -
To support reimbursement of up to $100 of the applicable practitioner fee, participants may submit to DLR a copy of the tax practitioner's invoice or other signed disclosure of their fee for services (e.g., sentence at the end of the required practitioner statement). The invoice must show a separate line for the LRP-related
assessment from any other services provided, such as tax return preparation. Other forms of written disclosure must specify the fee for the LRP-related assessment and should be on the firm's official letterhead. If the participant has paid the fee for LRP-related services, the invoice should reflect the practitioner's 'paid' stamp or other indicator to show receipt of the payment.
Taxable LRP Income
Benefits received from the NIH Loan Repayment Programs (LRP) represent
taxable income to LRP participants. There are three components to the
taxable benefits, as follows:
- Payments made by LRP to a lender or servicing agent on behalf
of a participant or directly to a participant to reimburse
loan payments previously made by the participant during their
LRP contract,
- Federal tax payments made by LRP for credit to a participant's tax account at the IRS (and Social Security Administration for Intramural participants); State tax payments are not made by the LRP on behalf of participants, and
- Tax reimbursement payments made by LRP, as described in these guidelines.
The total of calendar year payments for all three components of LRP income is reported as ‘taxable grants' in box 6 of Form 1099-G "Certain Government Payments" (as wages in box 1 of Form W-2 “Wage and Tax Statement” for intramural participants). For example , the LRP released 3 loan payments totaling $26,250 to a lender or servicing agent on behalf of a participant during 2006. Concurrent with each loan payment, the LRP released three Federal tax payments totaling $10,237.50. Additionally, during 2006 the LRP released to this participant a tax reimbursement payment of $825 applicable to increased taxes of the prior calendar year. The participant's reportable LRP income would be $37,312.50.
$26,250.00 Total LRP loan payments released in 2006
$10,237.50 Total Federal tax payments released in 2006 (39% of total loan payments)
$ 825.00 Tax reimbursement payment released in 2006
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$37,312.50 Total LRP income (Form 1099-G box 6 or Form W-2 box 1)
The NIH issues a Form 1099-G or Form W-2 for extramural and intramural participants, respectively, by the end of January following each year a participant receives program benefits. To expedite the delivery of Form 1099-G or Form W-2, participants should ensure their mailing address in NIH's system is current by logging into their secured site at https://www.lrp.nih.gov/Participants/signin.asp, and updating their information if necessary. The data appearing on Form 1099-G is also submitted to the IRS. The LRP income shown in box 6 of Form 1099-G is reportable as “other income” on line 21 of Form 1040 "U.S. Individual Income Tax Return" and applicable state/local income tax returns. The LRP income shown in box 1 of Form W-2 is reportable as “wages, salaries, tips, etc.” on line 7 of Form 1040.
The LRP income reported on Form 1099-G is not subject to self-employment tax. Extramural participants do not engage in a trade or business as sole proprietors, independent contractors, or partners as a result of their program participation. Participants conduct research that is funded by a qualifying research institution, which must be a domestic non-profit organization or U.S. Government (Federal, state or local) entity. In fact, extramural participants are usually full-time employees at the qualifying institution during their fulfillment of their LRP service obligation.
Federal Tax Payments
For each loan repayment, LRP also makes a Federal tax payment (the second component of LRP income) for direct credit to a participant's tax account at IRS at the rate of 39% of loan repayments. The Federal tax payments offset the increased Federal taxes that result from the LRP income. Applicable LRP authorization legislation refers to the provisions of 42 U.S.C. 254l(g)(3)(A), which stipulates:
"For the purpose of providing reimbursements for tax liability resulting from payments under [the loan repayment program] on behalf of an individual, the Secretary shall, in addition to such payments, make payments to the individual in the amount equal to 39 percent of the total amount of loan repayments made for the taxable year involved."
The total Federal tax payments made on behalf of a participant for a calendar year is reported as ‘federal income tax withheld' in box 4 of Form 1099-G (boxes 2, 4 and 6 of Form W-2 “Wage and Tax Statement” for intramural participants). The withholding should be included on line 64 in the payments section of a participant's Form 1040.
Additional Federal Taxes
It is possible that the total calendar year Federal tax payments for a participant will not be sufficient to fully offset the participant's increased
Federal taxes resulting from the reporting of LRP income. Applicable LRP authorization legislation refers to the provisions of 42 U.S.C. 254l(g)(3)(B), which stipulates:
"For the purpose of providing reimbursements for tax liability resulting from payments under [the loan repayment program] on behalf of an individual, the Secretary may make such additional payments as the Secretary determines to be appropriate with respect to such purpose."
Accordingly, LRP may reimburse the portion of a participant's increased Federal taxes that exceeds their Federal tax payments. This portion of a participant's increased Federal taxes is hereafter referred to as "additional Federal taxes." Reimbursement of additional Federal taxes is discretionary, subject to the availability of funds, and is considered for eligible participants who submit a tax reimbursement request to DLR. The DLR conducts an audit of participant tax reimbursement requests for compliance and amount. The audit involves the computation of separate estimates for the additional increased Federal and increased state/local taxes and correlation of the requested Federal and state/local tax reimbursement amounts with their corresponding audit estimates. If approved, the reimbursement payment is made directly to the participant. An approved tax reimbursement payment will not be released if the participant has an outstanding unverified loan payment.
Additional Federal taxes shall not include amounts paid or payable for underpayment interest or penalties. It is the responsibility of LRP participants to file their Federal tax returns in a timely manner and determine their need to submit quarterly estimated tax payments to avoid any underpayment or interest penalties. The NIH is not responsible for any
interest or penalty charges attributable to the underpayment of taxes or the late filing of a tax return.
Federal Overpayment
The total Federal tax payments made on behalf of a participant for a calendar year potentially could be greater than the participant's increased Federal taxes for that year. In other words, the payments made by LRP for credit to a participant's tax account at IRS could exceed the increase in Federal taxes resulting from LRP income. This condition is referred to as a "Federal tax overpayment." Participant requests for reimbursement of increased state/local taxes should reflect a reduction or offset by an identified Federal tax overpayment to arrive at a net requested reimbursement amount.
An "excess Federal tax overpayment" exists when the amount of a Federal tax overpayment is greater than the participant's approved reimbursement of increased state/local taxes and applicable practitioner fee (the net reimbursement is a negative amount). Upon identification that a participant had benefited by an excess Federal tax overpayment, the DLR provides the participant with two options, as follows: (1) return the excess overpayment to NIH by mailing a check to DLR payable to NIH, or (2) retain and carry-forward the excess overpayment so it may be applied to one or more future tax reimbursement request(s) as an offset to any approved amount of reimbursement. If the participant does not submit another tax reimbursement request, the excess Federal tax overpayment need not be returned to DLR.
Increased State/Local Taxes
A participant may incur increased state/local income taxes as a result of
reportable LRP income. The LRP does not provide tax payments on behalf of its participants for credit to their individual tax accounts with their state. In accordance with 42 U.S.C. 254l(g)(3)(B), LRP may reimburse such increased state/local taxes. The reimbursement is discretionary, subject to the availability of funds, and is considered for eligible participants who submit a tax reimbursement request to DLR. The DLR audits the tax reimbursement requests for compliance and amount. If approved, the reimbursement payment is made directly to the participant. As mentioned in the prior section, the disposition of a Federal overpayment may involve the application of the overpayment as an offset that reduces an approved reimbursement of increased state/local taxes.
The amount of increased state/local taxes shall not include amounts paid or payable for underpayment interest or penalties. It is the responsibility of LRP participants to file their state/local income tax returns in a timely manner and determine their need to submit quarterly estimated tax payments to their states of residency to avoid any underpayment or interest penalties. The NIH is not responsible for any interest or penalty charges attributable to the underpayment of taxes or late filing of tax returns.
Tax Practitioner Fee
A maximum of $100 per tax reimbursement request may be reimbursed to defray the cost of services provided by a licensed tax practitioner to assess a participant's income tax returns, determine the amount of tax reimbursement, and prepare a written statement (see Practitioner Statement section) on behalf of the participant. An invoice or receipt must show a separate line for the LRP-related assessment from any other services provided to support this reimbursement. Services associated with preparing and filing actual income tax returns are not covered by this reimbursement.
As mentioned above, the disposition of a Federal overpayment may involve the application of the overpayment as an offset against an approved reimbursement of the practitioner fee. A participant may submit a request for reimbursement of the applicable practitioner fee when there is not a corresponding request for tax reimbursement. However, a request for solely reimbursement of the practitioner fee would need to be accompanied by the participant and practitioner written statements that presents the required elements as stipulated in the following section.
Other
Eligibility - Participants are eligible for tax reimbursements only for the contract period or for the period in which loan payments are made. Therefore, tax reimbursement requests may be submitted for calendar years during which LRP had scheduled at least one loan payment to or on behalf of the participant. Participants may not submit requests for tax reimbursement if the only LRP benefit received during a calendar year was tax reimbursement.
Bank Information– Before submitting a tax reimbursement request, participants should review their banking information on file with the LRP. Tax reimbursement payments are sent electronically to participants' bank account. Participants who have changed banks or are uncertain of their banking information on file with the LRP should send a request to lrp@nih.gov for DLR to provide their banking information for their review. If the participants' bank information has changed, they need to notify DLR and request an ACH (Automated Clearinghouse) form. Participants who are current NIH employees at time of their tax reimbursement request can check their banking information using the MyPay online system at https://mypay.dfas.mil/mypay.aspx. Participants making changes on their banking information through the MyPay website will need to contact their payroll office to notify them of their changes. A failed electronic payment may delay the issuance of a tax reimbursement payment for 8-12 weeks.
Unverified LRP Payments– A tax reimbursement payment will not be released to a participant with an unverified loan payment made by the LRP that has been outstanding for 45 or more days. The DLR must be provided a lender account statement so it may verify the LRP payment. The statement must show:
1) The most recent LRP payment(s) and the date it was posted to the account;
2) The resulting/payoff balance after the LRP payment(s) was posted;
3) If any, a payment history of your payments made directly to your lender.
An approved tax reimbursement payment will be processed only after the LRP payments are verified.
Student Loan Interest -
If a participant's Federal student loan interest deduction reported on their actual Form 1040 had been partially or fully phased-out as a result of their reporting of LRP income, the practitioner should not include interest paid by the LRP in determining the amount of student loan interest deduction when preparing the participant's mock (pre-LRP) tax return. LRP-paid student loan interest must be subtracted from amounts reported by a financial or educational institution on Form 1098-E "Student Loan Interest Statement" or equivalent statement in determining the amount of student loan interest expense actually incurred by a participant (or spouse for joint tax returns) that may be deducted on the mock Form 1040.
Carry-Forward Deductions and Credits -
LRP participants may experience the phasing-out of a tax deduction or credit due to their reporting of LRP income. Tax regulations provide that certain phased-out deductions or credits may be carried forward for possible use on a future tax return. Where a phased-out deduction or credit that may be carried forward by the participant for use on a future tax return, the impact of the LRP income that caused the phase-out must not be considered in the practitioner's computations or analysis to determine the amount of a participant's increased taxes.
This is based on the reasonable expectation that application of the carried forward deduction or credit will reduce the taxes incurred by the participant for one or more tax returns that will be filed following completion of program participation. However, if a participant believes there will not be a reasonable opportunity to realize a future benefit from a carried over deduction or credit, they must submit to DLR a statement that asserts their concern over their potential to benefit by a carried over deduction or credit and appropriate documentation that supports the statement.
Common Errors Made on Additional Tax Reimbursement Submissions—Tax Practitioners Please Take Note
The following guidance has been developed based on the most common errors we identified when processing tax reimbursement requests. It is suggested that tax practitioners establish a quality control checklist addressing the issues below when conducting their analysis. We hope to experience fewer audit-related changes to the LRP additional tax reimbursement requests, once tax professionals take the following into consideration:
1. For individuals receiving W-2 statements NIH treats excess FICA paid to an LRP participant as a tax overpayment and should be taken into account when preparing their tax reimbursement analysis. Federal tax overpayments are also to be reflected within the tax reimbursement analyses.
2. The income differences in the Schedule A phase-out due to the increases in LRP income are to be included in the tax reimbursement analysis. The omission of this income difference results in an increase in audit related tax reimbursement adjustments.
3. Tax professionals need to carefully analyze how the LRP income impacts the Child Tax Credit phase-out.
4. Tax professionals should take note that participants who only received tax reimbursement payments from the LRP during the previous calendar year are not eligible for tax reimbursement. It is necessary to determine whether the LRP had made at least one loan payment on behalf of the participant in the tax year, otherwise this individual would not be eligible for tax reimbursement.
5. The student loan interest paid by the LRP should not be considered as a deduction when preparing a mock (pre-LRP) Form 1040 that supports the determination of the amount of increased taxes the participant incurred as a result of LRP. The LRP-paid student loan interest should be subtracted from the amount reported on a Form 1098-E (Student Loan Interest Statement) to determine the amount of student loan interest to include on the participant's mock Form 1040. Participants may deduct only the student interest they paid directly. The loan account payment history from their lender(s) should provide the amount of principal and interest for the LRP payments posted to their account during the previous calendar year. This is the amount needed to determine the total LRP-paid interest to be subtracted.
Finally, practitioners need to be particularly aware of who actually pays the student loan interest allowable for deduction as mentioned on page 6 of the Guidelines for Tax Reimbursement Requests, and sensitive to any phase-in and phase-out of items that are dependent on changes in the total income stream such as the AMT or other specific deductions and credits that may be unique to their client. Please e-mail any questions to LRP@NIH.gov . Thank you. |
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