Back in August, in the midst of finding daycare, getting ready to teach, paying two mortgages, and reeling from my mother’s illness, I got a most unwelcome piece of mail from the IRS. Actually, I think the timing of getting that letter is bad no matter when it occurs.
The IRS had selected me for an audit and declared that I owed them $1X00 in back taxes because I had failed to pay self-employment taxes on my graduate fellowship income. I had paid income taxes on the stipend, but not self-employment taxes.
Upon reading that, I did what any normal human being would do. I freaked out. When I calmed down, I read through all the tax guidelines. What I read was (purposely?) confusing, and as best I could make out, I was maybe in the wrong and the auditor was maybe in the right. And I’d been doing my taxes that way for all 4 years of the fellowship. If I paid the government those $1500, would they next come after me for the other 3 years? It was a sobering through.
But then I did what any blogger would do, I blogged about my situation. And wonderful, amazing, incredible blog readers saved my hide. (Note: what follows should not be construed as tax advice, simply a recounting of what worked in my situation.)
I got a number of really helpful comments, but several of them pointed out that as a fellowship recipient I was not an independent contractor and it was a “non-compensation type of grant” (as the IRS seemed to be claiming), so the stipend was not self employment. This distinction between a compensation grant and a non-compensation grant seemed to be key in the reading that I did. So I contacted my university and got them to send me a letter on official letterhead that explained that for the year in question I was on a fellowship, and X amount is what I was paid as a stipend.
(My tax situation was made somewhat more confusing because that year I did do some consulting work and so had paid self-employment taxes on a small amount of income.)
I attached the university’s letter to the “request for appeals review form” along with this statement
“$X,000 income was derived from a XXX fellowship, a non-compensation type of grant, which does not constitute income from a trade or business, and hence is not subject to self-employment tax. The $X income was derived from completely a completely separate activity: conducting a science education workshop for teachers.” I mailed off my appeal.
And then I waited. And waited. And then I got a certified letter saying that because I hadn’t paid or appealed within the 30-day window, I was now due in tax court. And then I got really peeved, because of course I had replied.
So I called the IRS. And let me tell you, this was the most pleasant part of the whole experience. There was no wait time, and the lady I talked to was very nice and looked over my case, saw that I had replied, let me explain my situation. Then she made a note on my file saying that it was her judgment that I had been correct originally and no additional tax was owed.
Two weeks later, I got a letter from the IRS saying that the case had been closed and no tax was owed.
Based on the number of commenters I heard from (and the emails that still come to me asking about it), it seems that the IRS habitually audits graduate students on fellowships trying to get them to pay self-employment tax. Either they themselves are confused by the tax code (a real possibility based on the vagueness of their publications) or they are being predatory towards grad students. (But since almost everyone earns more than grad students, this seems like a strange way of trying to ease the federal deficit.)
In any case, this is what worked for me. But don’t consider this advice, and all the usual disclaimers.