Steve - colleges send statements to the IRS (kind of like a 1099) that details "qualified expenses" any student incurs in a year. (Though it certainly wouldn't be all inclusive).
529 withdrawals are also reported to the IRS. So there is a matching system there. IF something is really out of whack, the IRS may take notice.
As with most anything, it wouldn't be looked at closer unless you were audited. But you would want to keep good records in case of audit.
The 529 custodian probably just has you fill out a simple form when you withdraw funds, to help determine tax treatment of the withdrawal. It's the same way with IRAs, etc.
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