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Can a Dependent Student File the FAFSA as Independent if the Student's Parents Don't File Federal Income Tax Returns?

College financial aid administrators grant dependency overrides in rare circumstances. The student might receive a dependency override if both parents are incarcerated or institutionalized. College financial aid administrators might grant a dependency override if there is an abusive family environment, such as when there are court protection from abuse orders against the parents. Living at home with one’s parents, however, is inconsistent with most of the circumstances that typically justify a dependency override.

College financial aid administrators generally do not grant dependency overrides for a failure to file required federal income tax returns. Subregulatory guidance from the US Department of Education requires college financial aid administrators to know “(1) whether a person was required to file a tax return, (2) what the correct filing status for a person should be, and (3) that an individual cannot be claimed as an exemption by more than one person.” Discrepancies involving these aspects of federal income tax returns are considered to be “conflicting information” and college financial aid administrators may not disburse federal student aid until the conflicting information is resolved. Colleges must also resolve all conflicting information before making any adjustments to the data elements on a student’s FAFSA, including a dependency override. Accordingly, a failure to file a federal income tax return when required would not be considered an unusual circumstance that justifies a dependency override.

Thus college financial aid administrators may not disburse federal student aid when the student, the student’s spouse or a dependent student’s parents fail to file federal income tax returns and were required to do so. Taxpayers are required to file federal income tax returns when his or her annual gross income exceeds certain filing thresholds. These filing thresholds may be found in IRS Publication 17 and are equal to the sum of the exemption amount and the standard deduction. But if someone’s income falls below these thresholds, the college’s financial aid administrator will wonder how they were able to support themselves. Such a FAFSA is likely to be flagged for verification.

Generally, employers who pay an employee $600 or more per year must provide the employee with an IRS Form W-2 regardless of whether the employee is paid by check or in cash. Likewise, if the employer pays $600 or more a year to a non-employee contractor, the employer must provide the contractor with an IRS Form 1099. Failure to provide employees with W-2 or 1099 forms may be a sign that the employer is engaged in tax evasion.

An employee must still file a federal income tax return even if his or her employer did not provide a W-2 or 1099 statement as required by the IRS. Even if the employee’s gross income falls below the filing thresholds, the employee may still be required to file a federal income tax return to pay Social Security or Medicare taxes. The employee will have to attach IRS Form 4852: Substitute for Form W-2 or Form 1099-R to their federal income tax return. Otherwise the employee is also engaged in tax evasion. It is best to seek the advice of a qualified accountant in such a situation.

Clearly, if an employer is engaged in tax evasion, the employee may lose his or her job by reporting the employer to the IRS. This puts the employee in a difficult situation. But no tax return means no federal student aid.