Issue

Thousands of international students and scholars have been receiving IRS notices informing them that they are being denied withholding credit amounts when they file their Form 1040-NR.  This situation has once again shed light on an oft-overlooked filing requirement of colleges – Form 1042-S.

Situation

The CFO at Marathon Bible College (MBC) has a question regarding scholarships to international students.  MBC is a private college that is exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  The CFO calls us to ask whether scholarships that MBC provides to international students who are nonresident aliens should be taxed and, if so, do they get a Form W-2?

Our answer is that “it depends”.  We ask the CFO if they provide scholarships for amounts other than tuition and educational fees – things like room and board, travel, and/or iPads.

Rules

From the Form 1042-S Instructions:

Amounts Subject to Reporting on Form 1042-S…

Students, teachers, and researchers. Amounts paid to foreign students, trainees, teachers, or researchers as scholarship or fellowship income, and compensation for personal services (whether or not exempt from tax under an income tax treaty), must be reported.

From Internal Revenue Code Section 117(b)(2):

Qualified tuition and related expenses.

For purposes of paragraph (1) , the term “qualified tuition and related expenses” means-

(A) tuition and fees required for the enrollment or attendance of a student at an educational organization described in section 170(b)(1)(A)(ii) , and

(B) fees, books, supplies, and equipment required for courses of instruction at such an educational organization.

So, put plainly…

Qualified expenses include tuition, matriculation fees, books, supplies, and equipment required for coursework. To be qualified, a scholarship or grant must be for qualified tuition and related expenses of a degree candidate at an educational institution.

Room and board, travel costs, incidental expenses, equipment, and other academic or research-related expenses that are not required for enrollment, attendance, or fulfillment of mandatory coursework are not considered qualified expenses (and thus are taxable to the recipient).

 

Bottom Line

Recently, the IRS held up refunds and/or disallowed withholding for international students due to issues with processing Form 1042-S.  The IRS needs to acknowledge that they are trying to do too much with this form.  There is a proposal floating around about instituting a “simplified” Form 1042-E – just for higher ed.  We will continue to update you on this issue.  As always, it would be wise to consult with a qualified tax advisor on these issues.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.