Wednesday, August 01, 2007

And then the other shoe drops...

We're being audited by the IRS. They want to count my fellowship income as self-employment income, costing another couple thousand in taxes for the year in question. I don't think they're right, but it means that I have to dig around and find out and then find documentation to show that the income was from a fellowship. If we lose our appeal, I expect that they will audit another couple years of taxes and we'll end up owing ~10,000. Yuck. And of course we only have a few weeks to get things in order.

Update: Oh! Crap! According to IRS publication 970 (Tax Benefits for Education), I was supposed to count it as self-employment income! Crap. Crap. Crap. Our only possible salvation now is that the year in question we used H&R Block and they should have caught something like that. In the dim recesses of my mind, I think there was something about if they made an error, they'd pay for it. maybe. maybe. ugh. ugh. ugh.

19 comments:

Jenn said...

It doesn't rain, it pours! I hope you're able to track down the proof that the income was from a fellowship. Good luck

hypatia said...

I hate to sound pessimistic, but I've always declared my fellowships as income. My business office advised us to do this and to pay taxes quarterly to avoid penalties for failing to pay in a sufficient ammount during the year. Apparently taxes aren't withheld from paychecks from fellowships, but that doesn't mean you don't owe them.

Sara said...

oh no!
i seem to remember that something similar happened to me, not that i was audited but that they sent me a letter saying that i owed as the income was self employment income (as opposed to just regular income.) i paid quarterly estimated taxes and wrote back saying that it was a graduate fellowship stipend and they said, oh, ok then it doesnt count as self employment. i hope it works out for you in the end!!!

bsci said...

fellowships are definitely taxable income. If you used an accountant, you are in luck. When a professional signs off on your taxes, they are taking responsability that they were done correctly. If they knew about the fellowship and said it wasn't taxable, then they have some liability. I'm not sure exactly how it works, but I suspect they might need to pay the fine and you'd still owe the back taxes.

BTW, in the end, did Allied movers work well? I signed a contract with them about 2 weeks before your post and the move starts in a few weeks.

bee said...

Check this out:
http://www.aoc.nrao.edu/NSFfellows/info/taxes.shtml

You should be declaring it as regular income, not as self-employed. Don't let them tell you otherwise, or a whole lot of us are up a creek if we are audited. I held an NSF grad fellowship at two different universities -- at one I did the quarterly estimated tax thing and at the other was treated as a university employee with taxes withheld. The amount of taxes should be the same regardless of the situation.

Your university should have an office to help you out (might be the folks that help out the foreign students with their taxes) or just contact H&R Block or a tax attorney.

ScienceWoman said...

Hey everyone, thanks for the comments. Just to clarify - I was paying regular income taxes (through estimated tax payments) and now the IRS wants me to pay self-employment tax too. I'll try to figure out how to give H&R block a call before I pay up.

ScienceWoman said...

bsci - In the end, our furniture was delivered by Allied 6 days after the latest arrival date that they'd given us. On that latest arrival date, our stuff still sat in a warehouse in Utopia. The only way it got to us as "fast" as it did was through the extraordinary efforts of the drivers (2200 miles in one day). We haven't submitted our delay claim yet, so I can't tell you how that turned out. I wouldn't use them again.

bsci said...

If you paid tax on the full income of the fellowship you don't have much to worry about. I don't remember the exact names of the boxes I filled out, but I only remember one place adding non-W2 and non-investing income made sense. As long as you treated the money as fully taxable income, you shouldn't have much of a problem
Unfortunately, I suspect you'll end up spending a lot of time clearing this up and time is valuable. Good luck!

I'm a bit scared about them being late since we won't be filling anywhere near a full truck, but I'm going between two population towns and it's prime moving season so I'm keeping my hopes up. I think all these companies are slightly sleezy, but I guess I'll have to wait and see how it goes for my case.

Sweet Irene said...

I am new to your blog and I don't know a lot about American taxes or the IRS, so I can't say anything sensible about it. I just wish you good luck and I wanted you to know that you have a new reader.

Anonymous said...

Wow and we thought science was hard! I didn't claim my graduate fellowship last year since it was a federal fellowship and I was told the taxes were paid before I received the fellowship, i.e. someone else paid the taxes on my money. Since my husband was also on this fellowship (GAANN) we literally made no money last year, just our summer state stipend. This accounted for a lot of money back on our return, which was great, but I guess I hope we did it correctly as we did it ourselves. I'm still on this same fellowship and my husband has a job for the government. We are hoping to buy a house within the next year and so I'm a little worried that not having a "salary" will affect our loan amount. I'd be happy to claim my income if it would help us out buying a home.
On a side not when I worked for the U.S. Geological Survey I received a 1099 as I was a contract worker and I remember HR Block asking about what I could deduct for working at home. I didn't work at home! They need to have another form for self employed besides the 1099. I was also charged a fee for not paying quarterly.

Why do taxes have to be so complicated!

hypatia said...

So as long as we're all freaking out about tax related things... Here's a change that affects people on a 9/10 month contracts who are paid over 12 months. It's worth reading and then asking your HR dept about BEFORE the start of the new year.

http://www.laborlawyers.com/showarticle.aspx?Ref=list&Type=1119&Cat=3388&Show=9727
http://www.wnj.com/publications/detail.aspx?pub=384

Thermochronic said...

When in grad school my paychecks switched to fellowship, which meant I had to take care of paying my own taxes (I complain about that here, but the self employment tax seems completely absurd. I read and re-read all of the fellowship tax codes and never saw anything that even mentioned a self employment status. It is bad enough that fellowships get treated like income even though we have none of the benefits of being an actual employee (the University doesn't have to pay social security, medicare, disability, etc..). Not to promote republicans, but Phil English (R-PA) has been pushing a bill for years that would greatly lessen the tax liablity for graduate students (here, including making room and board count as deductible expenses. OK, diatribe over, good luck with the IRS!

All Blog Spots said...

nice blog

j said...

The IRS claimed that I was supposed to declare my fellowship income as self-employment income as well (I had an NIH NRSA fellowship), but they were wrong. I got a letter from my postdoc school explaining why they hadn't had to file tax paperwork, and since I'd paid my quarterly taxes on the income, the IRS recognized the error. I'm pretty sure you would be in the same boat - it is definitely not self-employment. Seems like they make this mistake a lot? (The cynic in me says because then some people will just go ahead and pay.)

amanda said...

Don't know if you need any more information, but I came across an excellent article at sciencecareers.org.

Kelly said...

we got one of those too!

I am in the same boat- paid my estimated quarterly taxes, and now they want more...

we used an accountant too- he is trying to deal with it... I am doing the mad Google dash trying to find info- I think it comes down to if your fellowship required to you 'perform services' in exchange for the fellowship- in my case it is a T32- so I am hoping that since it is a training grant I will be ok...

I will send you an email so we can compare notes/ research if you are interested....

Wait, I'm in Academia Now?? said...

Sciencewoman: Where in Pub 970 does it say you should file for SE? I'm looking at the 2005 publication (the first time the IRS has clearly spelled out our liability, IMO), and I can't find that. On p. 7 of the 2005 Instructions, it says that if you file Form 1040, then you type "SCH" into the taxable amount; and *if* you are an independent contractor *then* you must include the amount in your net earnings. ("If you file Form 1040, report the taxable amount on line 7....Amounts you receive under a scholarship as pay for your services as an independent contractor are included in determining net earnings from your self-employment.") So, looks to me like the nature of your work determines which form you file; and once you've chosen that form, the stipend is included as income.

It sounds like the IRS themselves are still figuring this all out.

Now onto my own story:

My tax preparer for 2005 did not think my stipend was taxable, at all. (I should note: The only reason I got someone to prepare my taxes was because I was stumped as to whether my fellowship was taxable. My preparer was unsure, and consulted a tax attorney. They all got it wrong.) When I was preparing my 2006 taxes, Publication 970 finally made everything clear, and I filed form 1040X and paid out a couple thousand dollars. (The tax preparer was a coworker/friend, and I figured I'd take the financial hit and just not tell her.) I am lucky to have only erred on a single year.

I should also mention that the reason I got help with my taxes was because I heard other grad students telling stories of their tax audits (apparently we grad students make lots of errors with those fellowships). So let this be a warning to everyone out there receiving untaxed money, to do your homework.

Anyway, good luck!!!

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