The short answer is yes. The Internal Revenue Service can go after the money that you have put aside for your children’s college fund in what is known as a 529 Account. In practice, I have not seen them do this, but they have the ability to do it, and they will include it in your ability to pay when doing an analysis for an Offer in Compromise.
For those of you not familiar with a 529 Plan, it allows parents to put money aside for their children’s college education with favorable tax treatment. You should see a Banker or a Financial Planner about setting one up if you are interested.
Here is a summary of how they work: The payout has to be used for Post Secondary Education, for most people that means college. The money must be used for what is known as “eligible expenses.” This includes tuition, room and board, books and supplies for students who are attending an accredited college. Different states impose different limits on how much you can contribute to a 529 Plan. Many states allow over $100,000 to be contributed. Most states let their residents take a tax deduction for the contribution made into that state’s 529 Plan. Usually, write offs for pay in to out-of state plans are not permitted. There are no federal deductions for 529 pay in.
If you set up a 529 Plan for your child and they decide to skip college or they do not use all the funds, the beneficiary can be changed to a different family member.