Death And Taxes

For many financial aid recipients, life just got even more complicated.

Last week Harvard officials said they had turned over aid information on 3500 students for the calendar year 1989 to the Internal Revenue Service (IRS).

The IRS received the information--which included the students' names, Social Security numbers, financial aid given and tuition paid out--as part of an agency crackdown on students who are not paying income tax on their aid.

The crackdown stems from a 1986 change in the tax law that makes all scholarship money applied to room, board, travel or personal expenses taxable.

The financial aid office has mailed letters to all the students notifying them of the transfer of information. Caraway Seed '93, one of the students who received the letter, says she is "surprised" that the IRS is checking up on aid packages.

"I wonder if there weren't other students who would be affected," adds Seed, who says she has paid taxes on her financial aid "faithfully."

"If you get a lot in grants, it can really change your taxes," Seed says.

But according to University attorney Marianna C. Pierce, the IRS did not come by the information easily.

According to Pierce, the University denied an initial request for the information on the basis of the Buckley Amendment, a nearly 20-year-old law which says that universities do not have to release information on individual students.

The IRS obtained the documents only after issuing an agency summons, which carries the weight of a court subpoena.

"We were cooperative, but we didn't want to turn the information over unless we had to," said Pierce.

Further Action?

Now, with the information in IRS hands, Pierce and other Harvard officials say the issue is no longer a University matter. But IRS action here may portend further action at Harvard and at other colleges.

According to last week's Chronicle of Higher Education, there is currently no nationwide system of checking compliance with this part of the tax law. The publication also reports that the IRS often checks on a small group of taxpayers before launching a major compliance program.

At Harvard, the crackdown will only affect about one fifth of all students on financial aid. According to Director of Financial Aid James Miller, most students do not received enough money in grants to have tax laws apply to their aid.

But ironically, the students who do have tax liability are the ones who are most in need of financial assistance.

For the school year 1991-92, tuition, services and books--all non-taxable expenses--cost roughly $17,000. Therefore, only students receiving more than $17,000 in aid were liable for taxes.

While they willingly furnish details about the tax law, IRS officials refuse to comment on any part of their action at Harvard.

"We're not investigating," said Robert Ruttenberg, spokesperson for the Boston IRS office. "It's just another compliance check."

But for students on financial aid, the IRS action comes at a difficult time. University officials say that the recession has left need-based financial aid systems all over the country reeling.

In addition, some incoming students say they are confused by the widely disparaging aid offers they have received as a result of the breakup of the Overlap Group, a consortium of colleges which until recently jointly determined aid awards.

In light of these other changes, Harvard administrators say the tax crackdown could further complicate a financial aid process that has already left many students mystified.

"I'm not sure what motivated it," says James Miller, director of financial aid. "My sense from the student population is that it's very confusing."

One reason many students have trouble understanding their tax obligations is a set of federal laws that the IRS has done little to publicize within college communities.

Students, like most taxpayers, are required to pay taxes on income they earn above certain limits. Those limits are determined by how the students are listed on their parents' tax forms.

If students are not claimed as dependents on their parents' forms, they must pay taxes if they earn more than $5500. For students listed as dependents, that limit is $3400.

College grants or outside scholarships applied to anything other than tuition, fees or books, are considered to be personal, taxable income.

Financial aid, IRS officials says, is recorded on a personal income tax form under "salaries, wages and tips" and is taxed like income form any job.

But many students on financial aid say they do not understand these tax rules. And for some, their confusion keeps them from paying the taxes that they owe.

"I don't know," says Raj Yerasi '95, who receives about $20,000 in financial aid. "I don't think I'm paying them."

"I don't know if I owe the IRS anything," says Cullen F. Gerst '93, "but I sure haven't been paying any attention to it."

And that has Harvard administrators worried.

"I think it is very counterproductive to...encourage students to come here and then to turn around and tell them, 'you have to pay these taxes,'" says Seamus P. Malin '62, director of the international students office.

"The volume of revenue to the U.S. is low enough not to justify this," says Malin, a former director of financial aid.

Confusion Over Regulations

The problem is compounded, students say, because their financial aid forms do not show clearly which parts of their college costs they are paying and which parts are being paid by the University.

"As far as I know, financial aid is given out in a block," Yerasi says.

University officials fear that foreign students will be particularly hardhit by the IRS action.

Under current law, colleges are required to with hold 14 percent of scholarship funds for international students and to give that money to the government.

But Malin says foreign students are also more likely to owe taxes in addition to the withheld funds because many are not eligible for the same deductions that American students are.

"It is certainly true that foreign students do not have the benefits, the privileges of resident Americans," Malin says.

Abha Dawesar '95, from New Delhi, India, says she is stumped by a financial aid system that requires her to understand not only American tax laws but their Indian counterparts as well.

"I have not been able to sort out my financial aid matters," says Dawesar, who has her income tax forms but says she has little idea of how to use them.

"I'm really worried and confused about it," says Dawesar, who received $24,000 in grants from Harvard this year. "I'm not sure what are taxes on income and what are taxes on withholding."

But for many students the confusion has only just begun.

Many students are still unaware of the IRS crackdown and of what taxes they may owe. And even those administrators and students otherwise in the know are unsure how the tax law applies to student jobs that, while generating income, are also part of financial aid packages.

Additionally, students who have not paid taxes on their financial aid in the past may find themselves owing the government substantial penalties.

"I just don't know how many kids are affected," says Miller. "I don't know what the level of compliance out there is."