In this episode, Emily interviews Matty Dowd, a sixth-year PhD student in history at Princeton. Matty openly shares with us the tax horror story he lived for most of 2021 and into 2022. In 2018 and 2019, Matty reported his fellowship income as “other income” on his tax returns, which caused the IRS to mistakenly think that he owed self-employment tax. To compound the issue, the IRS’s snail mail communications never reached him. By the time Matty realized what was going on, the IRS thought he owed $16,000 in back taxes, penalties and interest. Matty reached out to multiple sources to help him resolve this, but ultimately used Emily’s workshop, How to Complete Your Grad Student Tax Return (and Understand It, Too!), to explain to the IRS what had gone awry and have the issue resolved in his favor. It’s a harrowing story with a happy ending! You won’t want to miss Matty’s ending thoughts on the most effective way to approach tax and financial education.
Links Mentioned in the Episode
- Matthew Dowd Princeton Profile
- PF for PhDs Tax Center
- PF for PhDs S14E2 Show Notes
- PF for PhDs Tax Workshop
- Evolving Personal Finance
- Matty’s Amended Tax Return Message to IRS 2019
- Matty’s Follow-Up Letter to the IRS 2019
- PF for PhDs Subscribe to Mailing List (Access Advice Document)
- PF for PhDs Podcast Hub (Show Notes)
Teaser
00:00 Matty: I’ll be very honest and upfront to the point where it may be a little bit embarrassing for me, looking back at how I handled this throughout these years.
Introduction
00:14 Emily: Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs. This podcast is for PhDs and PhDs-to-be who want to explore the hidden curriculum of finances to learn the best practices for money management, career advancement, and advocacy for yourself and others. This is Season 14, Episode 2, and today my guest is Matty Dowd, who at the time of the recording was a fifth-year PhD student in history at Princeton. Matty openly shares with us the tax horror story that he lived for most of 2021 and into 2022. In 2018 and 2019, Matty reported his fellowship income as “other income” on his tax returns, which caused the IRS to mistakenly think that he owed self-employment tax. To compound the issue, the IRS’s snail mail communications never reached him. By the time Matty realized what was going on, the IRS thought he owed $16,000 in back taxes, penalties, and interest. Matty reached out to multiple sources to help him resolve this but ultimately used my workshop, How to Complete Your Grad Student Tax Return (and Understand It, Too!), to explain to the IRS what had gone awry and have the issue resolved in his favor. It’s a harrowing story with a happy ending! You won’t want to miss Matty’s ending thoughts on the most effective way to approach tax and financial education.
01:55 Emily: If you would like to sign up for the tax workshop Matty and I discuss during this interview or one of the sister workshops for postdocs or nonresidents, you can find everything linked from the Tax Center of my website, PFforPhDs.com/tax/. The first live Q&A call for this tax season will take place this Thursday, January 26, 2023. So, if you plan to file your tax return in January, I highly recommend joining the workshop now so you’re prepared with your questions by Thursday. You can find the show notes for this episode at PFforPhDs.com/s14e2/. As ever nothing you hear on this podcast should be considered tax, financial, or legal advice for any individual. Without further ado, here’s my interview with Matty Dowd.
Will You Please Introduce Yourself Further?
02:52 Emily: On today’s episode, we are going to talk about one of my favorite subjects, which is taxes, but we do not have such a cheerful story. My guest today is Matty Dowd. He’s a fifth-year graduate student at Princeton in history. And he’s going to be telling us about a tax debacle <laugh> that he walked into a few years back, and that has taken a few years to unravel. So, it’s going to be a really like involved story. But for those of you who are confused about taxes or worried about taxes, <laugh>, this might be a really great episode to listen to and to share because a lot of people make the same kinds of mistakes that Matty did, and they get amplified and he’ll tell us how to resolve it or at least how he resolved it. So, really, really glad to have you on, Matty. Would you please introduce yourself a little bit further for the listeners?
03:36 Matty: Sure. Thank you for having me on! It’s great to be here. Yeah, so my name’s Matty. I’m a fifth-year PhD student, as was said. I studied at Tufts University for undergraduate and then did a master’s at the University of Paris. So, I went kind of straight through in the academic path, which may or may not be relevant to the later <laugh> discussion. And then I also worked a bit on the side and kind of continued to have over the past several years a mixture of like hobbies and other small jobs, translating, working as a resident assistant as a tour guide, playing piano at churches, tutoring, and that kind of thing. So, sort of supplementing my income with other hobbies slash skills that were somewhat related maybe to my interests.
Funding and Tax Preparation 2018-2019
04:23 Emily: Well, Matty, I’m really pleased that you’ve joined us because you’re going to share a tough story with us, but I know it’s going to be really beneficial to a lot of people. So, just for listeners’ notes, we are recording this in April, 2022. I’m planning to publish this in early 2023, but we are talking about events that started back in 2018, I believe. And so, Matty, tell us like for tax years 2018, and then I think you did the same thing again in 2019: How were you funded during those years? And like how did you prepare your tax return in those years?
04:56 Matty: Sure. So, in 2018 and 2019, I was on a university fellowship, so through my university, through Princeton. And in part of 2019 I was on what was called an assistantship, which was a bit different because I was a teaching assistant or a preceptor as we call them there. So, there was a W-2 tax form generated for this income, the assistantship income, that is. Whereas for the general university fellowship, there was no tax withholding, there was no W-2 form. And I also earned some side income in some of those other hobbies I referenced at the time. So, that was what comprised my income during those years.
05:35 Emily: So, I understand there was no tax withholding on the, what I call this awarded income, this like non-W-2 fellowship/stipend/training grant. There are different words for it, but I call it awarded income if it’s not reported on a W-2. You said that there was not any tax withholding, but did it show up anywhere? Did it show up on a 1098-T? Did it show up on a 1099? Anywhere?
05:54 Matty: Nowhere.
05:55 Emily: Okay. So, no tax reporting whatsoever. This is actually a pretty common approach, and it’s frustrating, but anyway, go on. How did you prepare your tax return?
06:05 Matty: <Laugh>, I should maybe say quickly before I say this kind of in general about this story, I’ll be very honest and upfront to the point where it may be a little bit embarrassing <laugh> for me, looking back at how I handled this throughout these years. But anyway, so here it goes.
06:21 Emily: The listeners are with you, don’t worry. A lot of people are in the same situation. I was, too, when I was early on in grad school.
06:29 Matty: Alright. So, I prepared the tax return myself primarily during these years using online software that was sort of available, like file your taxes, free filing, et cetera. I also didn’t pay estimated quarterly taxes during these years, even though I should have. And so, I essentially treated this, I used the filing software to kind of generate a lump sum number for the awarded income that I would then pay around the time I filed my taxes. So, obviously, this was not the right way to do this for a number of reasons, but it’s what I did for 2018, for 2019, and what I was doing for 2020 until I realized that there was a problem. And the last thing I’ll say about this is that I reported, and this will get into what the bigger problem was, that I reported my fellowship income as other income on the tax return. And so, this is what was going to lead to big problems for me down the road.
07:28 Emily: I have to say, Matty, that I did the exact same thing when I was in my first few years of graduate school. My university, Duke, does things a little bit differently because at that time they did withhold income tax from my awarded income stipend. But they issued a form 1099-miscellaneous [MISC] with Box 3 income. And so, if you look at like the instructions, like you didn’t get instructions right because you didn’t get a form. So, good on you for even like knowing that this was even taxable income. So, actually you did something right from the beginning, which was reporting it <laugh> even though you reported it slightly incorrectly. Like if you look at the instructions for what I was dealing with, it says report it as other income if it’s not self-employment income, which this wasn’t. So, I did that. And it turns out that was wrong. For me, it didn’t get caught in the same way that yours did probably because of how it was reported. So, I didn’t have the same outcome, but I started down the same path that you did. So, you are definitely not alone. I still talk to people to this day who have read my materials and are asking me, do I report this as other income? The answer is no, and we will see why.
IRS Notices During COVID
08:30 Emily: Okay. So, you know, you sort of mentioned that you figured out when you are going to file your 2020 tax returns, so that’s early 2021, right? That, you know, these errors had gone on. But let’s back it up and talk about what was happening from the IRS’s perspective. So, the IRS receives your 2018 year, 2019 returns, they see this other income. What are they thinking, and what are they trying to do to reach out to you?
08:53 Matty: So, the IRS is beginning to send me notices from, I guess it was around actually the summer of 2020, that the IRS began sending notices about my 2018 tax year. And, the thing was, I received none of the notices. This was also going to be a big part of the story. The reason for that, there are really two reasons. The first is that I had moved out of my Princeton graduate apartment abruptly at the start of COVID in March of 2020. And so, I was living in Massachusetts with my family, my sister, and her fiance, just kind of waiting out early COVID, not sure what was going to happen. I didn’t think to change my address on file with the IRS at that time, which in my slight defense I think was a reasonable thing to not think of.
09:45 Matty: The second problem though, which also gets back to another important part of why those tax filing softwares aren’t great if you don’t use them in the right way, is that the IRS didn’t even have my correct apartment number because I had typed it in correctly on the website, which I was able to go back and check, but that website generates a 1040 tax return form, which I didn’t look at before I submitted it and it cut off my apartment number. So, it said I lived at apartment 40 and not 405. So, even though after I left Princeton, I had, you know, set up a mail service through the USPS, who I don’t even know if that worked <laugh> to forward mail at home. And had I been at Princeton, you know, I know the building manager, they may have seen the letter and kept it aside for me, but in any case, not having the right address on my file did no benefits for me as the situation went on.
10:41 Matty: So, basically, yeah, from the IRS perspective, I didn’t respond to months of deficiency notices regarding 2018. And so eventually after not hearing from me, they just assessed a bill on my IRS online account for basically $7,500 in underpayments, penalties, and then fees, interest rather, associated with the non-paid taxes, which I didn’t discover until preparing my 2020 tax return in May of 2021 because it was a bit delayed during that year. Because of COVID, you could do it in May. And I saw this charge on my online account and obviously was very thrown off and surprised by that.
11:23 Emily: Okay, so in a second, I want to get to why this massive charge existed because again, you had paid what you thought was your income tax, you know, or in those earlier years. But first, I just want to take a little sidebar to tell you that I had a very similar experience with the Virginia Department of Taxation. So, state-level taxes. I moved from Virginia to North Carolina when I started graduate school. So, I was like a part-year resident in each state for that year. And for whatever reason in the next year, Virginia decided that I owed them income tax even though I was paying tax in North Carolina. And I had been a part-year resident the year before, which they supposedly should have known, but they could not track me down because I had moved multiple times near graduate school. I did not set up mail forwarding, which you were like, that’s great that you even thought of it.
12:10 Emily: I did not do that. I also got married and I changed my name. So like, they could not find me to like assess me what they thought was their tax bill. So, ultimately, that bill went to collections and I like freaked out when, this was like years later, they finally sent to collections. The collections agency immediately found me because guess what? They use things like your phone number, which the IRS does not do. The IRS will strictly only use mailing addresses. And so, anyway, the collections company found me and I was able to quickly figure out that this was just a completely like fabricated bill. Like I had no responsibility for this, and it was very easy to get it cleared up, but it really freaked me out when it happened because like, I’m supposed to be like this responsible financial person and I’m like sent to collections over something.
Incorrect Characterization of Fellowship Income
12:51 Emily: Like it’s really, anyway, I just think it’s not great that in the, you know, era that we’re in with all these other modes of communication that we have that they still rely on physical mailing addresses, but they do. That’s the policy. So, you know, we have to deal with it. So like, good on you for setting up mail forwarding <laugh>. Too bad that the address was actually wrong and blah, blah, blah, all these other problems. So, that’s my sidebar. What I want to ask you about though is, so why did the IRS think that you owed this massive tax bill?
13:19 Matty: So, this goes back to how I had characterized the fellowship income. So, actually in reality there were a few problems with the tax return for 2018, even apart from the address. But the major one, and the thing that I think raised the attention of the IRS, was the fact that I had reported this as other income, which they thought that I needed to pay self-employment taxes on. And this self-employment tax assessment was not a part of the number, the lump sum number I generated from those filing tax softwares. That was something separate that I was going to have to figure out on my own. And so, this is what led them to send the initial deficiency notice, which again, I didn’t receive, but based on the kind of the timeline, I think I figured out, would’ve come in the summer of 2020 to Princeton, with an underpayment of about $5,500 that they thought that I owed in self-employment and hadn’t paid.
14:17 Matty: And then the penalty, which was in part a function of by how much I’d underpaid, I would think it was an $1,100 penalty because I had underpaid by over $5,000 and then interest on that. So, that’s what they were really after. And if I can just add, so I’ve sort of referenced this already, but I realized I had, you know, this was after I had filed taxes for 2019, a long time before. So I knew I had the same problem for that income that I had done in the same way. And I guess we’ll maybe get into this in the next question, I don’t want to jump ahead, but just to say the low point was that in June of 2021, I started receiving notices about the 2019 tax year for about the same amount. So at one point, the Internal Revenue Service thought that I owed them about $16,000 between taxes, penalties and interest. So, that was kind of the low moment, but yeah, I hope I didn’t anticipate <laugh> your later questions there.
15:23 Emily: No, that’s horrifying for a grad student, that’s what, like 50% ish of your income for the year?
15:30 Matty: Yes.
Did You Know This Was a Mistake?
15:31 Emily: So, was there ever a point that you thought maybe they were right? Or did you know from the beginning that this was a mistake?
15:38 Matty: So, I didn’t know from the beginning that this was a mistake because I didn’t really understand how this works. I didn’t have the vocabulary to understand it. This also maybe gets into a bit where I found your site helpful and maybe I’ll say a bit more about that in a minute, but it was not really understanding it. And so this week in May of 2021, as I’m realizing that I have this charge from 2018, I’m preparing the 2020 tax return, wondering what went wrong and how to do things the right way, that I began to realize about this sort of other income question about really the specific nature of how to manage these sort of awarded income from university fellowships that don’t generate any documentation associated with them. What I will say is that I did very early in the process reach out first to my parents and then to my parents’ accountant who was, I’m sure that she’s very competent, was very nice, but didn’t have experience with this and actually thought that I did owe them that money.
16:44 Matty: And so, I was actually encouraged by a tax professional to pay the money, and then she was going help me draft a letter to try to get the penalties minimized because it was my first mistake. But around the same time I’m reading the IRS site, I’m finding your website, Emily, and even though I feel like am I being too, you know, is this hubristic of me to think that I know more than the tax professional, but I really sensed that no, this really was a mistake in how I characterized the income. I don’t actually owe it. But it was an open question for a few days whether I was right or not. And then obviously a separate question as to whether the IRS was actually going to agree that I was right or not.
17:26 Emily: Absolutely. I think it is so hard for graduate students and postdocs and anybody with this like weird academic income, as you said, to kind of like challenge or like stand up to or like correct someone who you’re paying <laugh> to help you with this process. Like who’s supposed to be an expert, but like, yeah, the fact is that they may not deal with these types of taxes very often. They may like, whatever, like you said, they’re very nice. They’re probably very competent in many areas. Like for example, small business taxes is probably what she’s much more familiar with than fellowship income. And so she was going down a route of like, oh yeah, this was self-employment income and oh yeah, these are correct, you know, charges, but like we can get the penalty blah blah. That’s a fine thing if like, the whole thing was right from the beginning, but it wasn’t. So, I would love to hear more about how you like discovered and then worked with the IRS, like to clarify for them that this was actually fellowship income that you should have never even thought to report as like other income that, you know, we just went off the rails from the start with that reporting like type.
18:28 Matty: Yeah. Yeah. So, what I was able to find out right away once I saw the charge on my account online was I could download the transcripts and records of accounts from 2018. Because remember at this point I still had received no notices about it. This is just me logging on very casually one night in May of 2021 to see if I got a stimulus payment in 2020 that I had missed. So, that 2018 tax record or record of account and transcript, which you can I think normally download from past tax years, helped me to see what was actually at issue and to see why the IRS had labeled what they had as penalties. What I then did, the good piece of advice I got from the accountant was to call the IRS either late in the day or early in the morning to try to get through and talk to someone, which I did.
19:23 Matty: And for anyone who’s called the IRS, and I would do this many times over the succeeding several months, it’s quite an experience. You know, sometimes you get people who are very helpful and knowledgeable, sometimes you don’t. Sometimes it takes a long time. Again, I was still at the stage where I was learning about this and like figuring it out. And so again, it’s difficult sometimes you don’t understand what people are telling back to you. But eventually what happened through a few phone calls in the days after I made the initial discovery was I talked to an IRS agent who basically told me that I could fax, he gave me a fax number, and said I could fax an explanation of my situation to what he called the reconsideration department, which sounded like 1984, kind of scary style instructions. But that was the first time that I talked to someone where there was a kind of glimmer of, okay, maybe there is going to be some potential light at the end of this tunnel.
20:24 Matty: So it was, in talking to those agents, I came to realize a number of the mistakes, which I’ve already communicated to you and began to see a way out of beginning to resolve the 2018 tax issue. I was also though a bit uncertain whether I should also talk to them about 2019, if that would just be confusing. Was that going to be bad for me in some way? I was almost treating it as though, I mean, I don’t have much experience like with lawyers or with like a criminal case or something, but as though I didn’t really know how to best talk to the IRS about some of these issues. And yeah, but I guess that first piece of advice was the beginning of the rest of the story.
Commercial
21:11 Emily: Emily here for a brief interlude! Tax season is about to start heating up, and the best place to go for information tailored to you as a grad student, postdoc, or postbac is PFforPhDs.com/tax/. From that page I have linked to all of my tax resources, many of which I have updated for tax year 2022. On that page you will find free podcast episodes, videos, and articles on all kinds of tax topics relevant to PhDs. There are also opportunities to join the Personal Finance for PhDs mailing list to receive PDF summaries and spreadsheets that you can work with. The absolute most comprehensive and highest quality resources, however, are my asynchronous tax workshops. I’m offering three tax return preparation workshops for tax year 2022, one for grad students who are U.S. citizens or residents, one for postdocs who are U.S. citizens or residents, and one for grad students and postdocs who are non-residents.
22:19 Emily: Those tax return preparation workshops are in addition to my estimated tax workshop for grad student, postdoc, and postbac fellows who are U.S. citizens or residents. My preferred method for enrolling you in one of these workshops is to find a sponsor at your university or institute. Typically that sponsor is a graduate school, graduate student association, postdoc office, postdoc association, or an individual school or department. I would very much appreciate you recommending one or more of these workshops to a potential sponsor. If that doesn’t work out, I do sell these workshops to individuals, but I think it’s always worth trying to get it into your hands for free or a subsidized cost. Again, you can find all of these free and paid resources, including a page you can send to a potential workshop sponsor, linked from PFforPhDs.com/tax/. Now back to the interview.
Helpful Advice: Finding the PF for PhDs Tax Workshop
23:20 Emily: So, let’s continue then. So, how did you ultimately figure out that, you know, you should have explicitly communicated this as being fellowship income, and that that miscommunication was at the root of all these other issues?
23:34 Matty: So, I think this is really where your website and especially your workshop on the, I forget the specific title, like filing a grad student tax return and understand it too. Something like that.
23:47 Emily: Yeah, it’s How to Complete your Grad Student Tax Return (and Understand It, Too!). If anyone wants to find it, you can go to PFforPhDs.com/taxworkshop. I will have the 2022, presumably, version of that available by the time this comes out. So, yes, go on.
24:03 Matty: Yeah, so I, you know, I think I had maybe found on the IRS website some information about this as I was looking around, but the clearest statement of and the most focused advice for graduate students in the situation that I was facing at least, I mean, not so much, you know, when you’re two years behind the ball and facing what I was facing with the IRS, but with just filing a tax return in general–because I still needed to do the 2020 one at that time–was through your website. And so that’s, I think when it became clearest to me about this other income that this was what sort of my problem had been and finding the steps that I would need to do in order to to do the 2020 return, right?
24:56 Matty: And then also in the communications that I was to have with the IRS, by faxing them info about 2018, how I should sort of write my statement explaining what had happened. So, I think that workshop was, I mean, it was helpful on its face for just filing a sort of a normal tax return and understanding what you’re doing, but it also helped me to find the words to explain to the IRS in writing and then, which I also then backed up with other documentation that I faxed along with it, related to the 2018 issue.
25:32 Emily: So, it is interesting to me that you found the workshop. And as you said, the workshop is great for like preparing your this year’s current year’s tax return. It’s not designed to like ameliorate past issues, as you said, I’m <laugh> I’ll actually link in the show notes. It sounds like you maybe didn’t find this through a Google search, but my old personal finance website, which is evolvingpf.com, I actually published a couple of posts from people who had been in your exact same situation. They had reported their fellowship income as other income, the IRS thought it was self-employment, and I actually published their accounts as well, like we’re doing here on the podcast, of how they fixed the issue. And like even they included the text of the letter that they sent to the IRS. Would you actually be willing to share like an anonymized version of the letter that you sent, or is that too much information?
26:20 Matty: No, no. Yeah, I’d be willing to do that.
26:22 Emily: Okay. So, we’ll set that up in the show notes. So, by the time this is published, we’ll have that all ready to go. So anybody else who finds this podcast episode later and is in the same situation, can at least not have to repeat all this research that you did and like have sort of a model to go off of, as you said, to have even the language to explain to the IRS. It’s funny because when you’re filing a fresh tax return, you can just sort of report your taxable fellowship number on your tax return, and the IRS you know, in whatever, 99.999 cases is not going to come back to you and say, “Wait, was this really fellowship income? Blah, blah, blah.” But once you go down your route of you have misreported in some way and they’re suspicious about it, then you have to back it up with documentation. Like you probably sent in your award letter, I would imagine, that like uses the word fellowship. Yeah, go ahead and talk about that.
27:04 Matty: Yeah, yeah, no, so I did, I mean again, at that stage too, I was just trying to gather as much information that would be potentially helpful or would, you know, show that I was kind of legit in the case that I was making. So, I probably sent way more than they <laugh> needed or cared to look at. But I think I did include the award letter and then even maybe like, not a pay stub, but some kind of like summary of, you know, year-end summary that showed at least that I was receiving income from Princeton University as a PhD student. Yeah.
Patiently Waiting for 2018 Tax Year Resolution
27:47 Emily: Yeah. And so, did all of that like fix the issue? I understand this took several months, played out, but like this ultimately was effective. Yes. So like what was the final outcome?
27:56 Matty: Yeah, so actually maybe first, let me just say, so this was all, that initial fax was all about the 2018 tax year. But meanwhile, I knew I had this 2019 problem. I felt good about the 2020 return that I was doing, because again, I had used your website and your workshop and felt like I knew what I was doing for the first time. But for 2019, in speaking with, I’d also reached out to someone at H&R Block, local to Princeton. And their advice was basically to file an amended return for 2019 to try to anticipate if the IRS is going to probably come after me for that year because they’ll think I made the same mistake, to anticipate that by filing an amended return. That was one advice. The second piece of advice was then for me to figure out if I thought I owed anything to the IRS from those years to pay it as basically right away or as soon as I could.
28:56 Matty: And so, I did both of those things for 2018 and for 2019 and, in fact, I thought I calculated that I did underpay in fact, by a few hundred dollars. And so, paid that, basically. So, by the end of May or maybe early June, I was, from my perspective, totally paid up. I didn’t know what they were going to do in terms of penalties and how that was going to work. And then for 2019, I submitted an amended return, which you can follow online, how it’s being processed and you know, it’s supposed to take, I think six to eight weeks, and it was so delayed because of COVID. So, I never even got word that it was received. I was worrying, I sent it in by sort of USPS. I was worried I didn’t put enough stamps on the package.
29:43 Matty: Like just these kind of silly administrative things that hang over you as you wonder and hear nothing about it. But anyway, so at this point then I had 2018, all the faxed information, and then 2019, the amended return. And it’s pretty amazing. I sent all that in May, and I heard nothing from the IRS about the 2018 fax from May 12th until Valentine’s Day of 2022. So, nine months. I had heard every three months I would get a letter from them saying, “Hi, we’ve received your information, which was reassuring, but we’re very busy, we’ll get to it as soon as we can.” Meanwhile, though, so this is the reconsideration department. The collections department is saying, “Hey, we’re going to file a lien or levy against your assets,” because from their perspective, this was a case open and closed, and I didn’t pay it, I didn’t challenge it, I didn’t respond.
30:35 Matty: So, they are not being as let’s say generous, that’s not the right word. Like the other side, the reconsideration department can take as much time as they need to process it. The collections department is not giving me that option, even as I explained to them what’s going on. But they’re saying, well, how do we know you have a legitimate case? Which from their perspective, it’s understandable why they would take that position. So, as this is playing out and I’m hearing nothing and just waiting, which is really the dominant part of the story, it’s the waiting in between this really frantic week in May until February to begin to hear stuff about anything actually occurring with my cases. It was being in touch with the collections department who actually I mean, they didn’t force me to, but I was highly encouraged to sign a payment agreement with them to agree to pay the 2018 taxes with the understanding that once they got to my case, if it turned out that I had, you know, paid them any more than I needed to, they would refund me the money.
31:44 Matty: And because I was nervous about what might happen, I mean, I don’t have a ton of assets <laugh>, I just didn’t know what was going to happen the longer that I was getting these sort of scary notices, final notices, and that they’re going to go after me. So, that was sort of a long-winded answer. But the major process was again, waiting, hoping the reconsideration department and amended tax return will be processed, and in the meantime, as the clock is ticking, beginning to get more notices about both years and about my needing to pay.
Agreeing to a 180-Day Payment Plan
32:18 Emily: So, ultimately, did you agree to a payment plan? Or did you hold out long enough that the reconsideration department got around to it?
32:25 Matty: So, I agreed to a 180-day, I guess I’ll be honest, I’m not entirely even sure how it was supposed to work. I agreed to, at the start of July of 2021, to a 180-day plan. And then at the end of that, I was then supposed to have made an agreement on how I was going to pay, which would include, you know, either a big lump sum or certain monthly payments. But when I made that agreement in July, I was thinking, okay, six months, like the reconsideration department is going to get it. I was so naive when I sent in that initial tax, I was like waiting the next day to get a phone call as though someone was just going to be there and call me. And so yeah, so July 1st, I do that. Six months, still not processed.
33:13 Matty: So, this is like right around Christmas now. So, I think the day after Christmas, I’m calling the IRS. Again, it’s intervening at all these different points throughout this last year of my life and making an agreement to pay them starting in February, $86 per month, until this thing is processed. Thankfully, the Valentine’s Day letter arrived and then it was in that letter where they made the adjustment to the taxes that I owed. And once they did that, the plan that I had agreed to pay was canceled, was sort of null. And yeah, so I received the February 14th letter, which reduces the tax burden by like $5,500, which is what I thought. It takes away the interest that I owed on that. It keeps, it doesn’t specify this, but it continues to say that I have like about $1,100 related to that tax year, which was the amount of the penalty.
34:11 Matty: So, I was wondering, okay, are they still keeping that penalty? Is that the right amount? Given that I didn’t underpay by as much as they thought. And so, I tried to get in touch with them over the phone, impossible. I’m like, I know how this goes, I’m just going to wait for the next notice. We’ll see. But then the ultimate resolution for 2018 came about a week later, which was I got a letter from the United States Treasury with a check <laugh> for $172 for the 2018 tax year. And then the next day, a notice from the IRS saying, we’ve adjusted totally for 2018. Like basically you’re closed out. We owed you $169 and $3 and 2 cents in interest. So, that was kind of how the 2018 resolution came about.
34:58 Emily: It’s amazing actually how much COVID impacted your story, right? From the move that made you not receive any of the notices, to the IRS being just incredibly backed up. Like I know the IRS gets, like, everybody loves to hate the IRS, but like they’ve had a lot to do <laugh> over the past couple of years, but like delayed deadlines and like the stimulus payments and then the advanced child tax credit payments, like that’s a whole new thing. Wow. Sending out like basic income to some people. They’ve never had to do that before. So like, yeah, it makes sense. They have been incredibly delayed. Maybe in a different year if COVID wasn’t impacting all of this, you would’ve gotten a response within a month or two or three months or whatever. Maybe the timelines would’ve worked out. But it’s good to know that you were patient <laugh>, you tried to get them to be as patient as possible with you. You agreed ultimately to that monthly plan, which is like, I mean, $86 a month is like not, I mean, whatever, it’s something, but compared to the amount that you actually owed, that’s a very small fraction. Or not actually owed, but they thought that you owed. Yeah.
Amended 2019 Tax Return
35:55 Emily: Okay. So, we know the 2018 resolution. For 2019, did the amended tax return work, or how did that play out?
36:02 Matty: No, so the 2019, they started sending me notices about it in June of 2021 before having processed the amended return. Which was obviously what I was trying to avoid, but in discussions then over the phone with the IRS, I was in a better position, I think, in terms of my discussions with them for being able to say, “Oh, I filed an amended return before you sent me this. I paid what I think I underpaid before you sent me this notice, and here’s all of the information.” And basically included, you know, sent a letter back to them, which included everything that I had on the amended return, and then how I came to those numbers. And so actually as we speak now, I’m still in the late stages of that. Yeah, so it was the same tax office dealing with the issue.
36:56 Matty: I think once they got to it, everything just kind of worked faster. So, it’s at the point now where the tax that I owe has been deducted for 2019, and I mean, unless something radical changes in the next few weeks, then I will have received either a check from the treasury for some kind of small amount, or maybe I’ll owe them a little bit more, something like this. But basically the same resolution of you listed the income as other income, you didn’t need to pay self-employment taxes on that. So, that’s where the 2019 stands. And I’ve heard nothing about 2020, which I think means actually, I don’t know, maybe I’ll hear something soon, but I did follow the workshop and I know what I’m doing much more than I did at that time. So, I feel pretty good about that year.
37:46 Emily: Yeah. And by the time we publish this, I mean, you can send me an update, everything went fine, it was resolved, you know, essentially in your favor or, oh, no bigger emergency. Let’s record a follow-up <laugh>. Okay. So hopefully it’ll all go through the way you expect it to.
38:01 Emily: Emily here, breaking in from post-production to give you Matty’s follow-up. Everything turned out exactly as he expected for 2019. The penalty was eliminated, and he actually ended up receiving a small refund.
Key Takeaway Points for Listeners
38:14 Emily: So, let’s kind of summarize a little bit. Key takeaway points for the listener who might be freaked out and facing a huge tax bill. By the way, I just want to say like a rule of thumb, on fellowship income, let’s say if you’re paying to the federal government more than like, I don’t know, much more than like a 10% effective tax rate, something has gone awry in this like process. So like, self-employment tax is going to be 15.3% of your income. So, if you have like 10-ish percent plus 15%, if you’re up at 25% of an effective tax rate, you know that you’ve been hit with self-employment tax. So, that’s my key takeaway of just like a sort of sanity check on how much tax do you actually owe? Don’t pay self-employment tax if you don’t actually owe it. But let’s go to your key takeaways.
39:00 Matty: So, I think my key takeaways, one of them is the “(Understand It, Too!)” parenthetical in your workshop title, because when I think back to why I got into that situation in the first place and how I sort of struggled in those early days to figure out what the problem was, I think really one of the major issues was that my approach to filling out the tax return was I was looking for a formula to just kind of input information, not have to really think about it. And then kind of hoping that everything went well and figuring that, okay, if I don’t hear anything from them, then it’s probably fine. And I didn’t hear anything for two years after starting to handle my tax return this way. So, I guess one major kind of lesson would be to really try to understand what it is that you’re doing.
39:52 Matty: And it is frustrating and I would say that most places, most websites, even the IRS website is not especially well suited to starting at a low level of knowledge of financial issues. This was one of the things that I appreciated about your website, Emily, was because I felt that it was not just how to file the tax return, but it was sort of talking about it in a way for people who aren’t used to doing that. And I think this maybe gets back to my going straight through my not having really had another full-time job apart from being a graduate student, not having a familiarity with this process in another setting that made me want to just not deal with it. I was a busy graduate student, I just figured I would be fine and I wanted the easiest way, which was that tax filing software.
40:40 Matty: So, I think once you get over the fear of not understanding the confusing nature of sort of filing taxes and paying these kinds of taxes, then it became easier to know what the problem was and know how to communicate about it. And then the second one, maybe a smaller takeaway, but again, it was just to be sort of cautious about where you get and how you get tax advice from people who don’t have experience specifically related to the types of issues that graduate students with this awarded income are facing. Because I got advice from, you know, reputable people, reputable websites that led me to the filing software to, you know, almost not that I was close to paying the initial tax penalty as I had been initially recommended to, but I mean, that’s thousands of dollars of difference if I’d just gone along and done that.
41:35 Matty: So again, maybe that returns to the first point of if you sort of know or have a better sense of of what you’re doing with a tax return and treat it that way as opposed to just, again, a chore you don’t want to deal with, or a formula that you’re looking to kind of take a shortcut with. That’s the better way to handle it. And I’ll say, I mean, I’m not an expert. I don’t mean to sound now that I have gone through this as though I know and understand everything about taxes, but at least you kind of know a little bit more and you know where the problems are, you know how to communicate. And I think that was really important for me in reaching the stage that I have at this point with the tax process.
Building Tax Vocabulary and Communication Tools
42:21 Emily: I’m really, really glad to hear you say that, that my material reached you <laugh> in a way that made sense to you that other places weren’t, because that’s really what I have been striving to do with both, you know, what’s available free on my website, pfforphds.com/tax, and also through the tax workshops. I really do want to give you those, like the vocabulary and the communication tools because I’m sort of a fan of people preparing their own tax returns, like completely manually, but I understand that most people don’t do things that way. And so, I’m trying to give you the vocabulary to like translate between what you know about your own income and expenses as a graduate student, for example, and being able to talk to an accountant or being able to interface with tax software or talk to the IRS or whatever is needed to give you that like translation ability. Yes. So, I’m glad to hear that it worked out that way for you. Is there anything else that you’d like to tell us about this story as we’re concluding here?
43:13 Matty: I guess maybe to say, yeah, I hope this didn’t come off as, you know, me trying to sound like a victim of the IRS. I mean, I think there were some issues in terms of the timing, the way that it worked out, the really frustrating bureaucratic aspects of it. But I also, you know, I made some mistakes, too, throughout the process. And so yeah, I guess it was kind of yeah, I just hope it didn’t sound like me whining about the annoying, you know, scary IRS. There were some people that I talked to there who were quite helpful and, you know, I think the most important thing was just, as you said, kind of being able to find that language to communicate with them about the specific issues, and then kind of waiting out the process which you have to do when you’re dealing with something like this.
44:08 Emily: I think what we briefly mentioned earlier, but like we talked about this with respect to the accountant that you went to, but it’s also true for the people you talked to at the IRS. They’re way more familiar with self-employment income and small business income because there are so many small businesses in the United States who have, you know, some kind of trouble and turn to resources for filing their tax returns compared to graduate students and postdocs and other people with awarded income. It’s just such a more common situation. They want to fit you into a box, that’s what they’re familiar with. And so, you as a person receiving awarded income, I think should be kind of forewarned that that’s going to happen and be able to say to them, “No, I am very confident this is not contractor income. This is not self-employment income. I do not have a business. I received fellowship income or grant income or whatever it is.”
44:52 Emily: And so, to be able to firmly say that to them will help hopefully redirect them down the correct line of thinking and away from the most common scenario, which is this other self-employment stuff. So, I’m really glad that you brought that up. I also am glad that you mentioned that there is just a lot of waiting involved with these, you know, filling, you know, figuring out the transcripts and like submitting the amended returns and all of this stuff. Yeah, that’s kind of part and process with this whole process. So, we’re getting the very, very condensed version of the story, but obviously, it took like, well, it took multiple years for this to play out in total.
Best Financial Advice for Another Early-Career PhD
45:23 Emily: Okay, Matty, thank you so much for sharing this story. It’s really amazing. I hope it, you know, prevents people from going down the same, you know, the initial mistake and then the amplification of that mistake that you had to go through. So, I want to leave the listener with the question that I always ask my guests, which is what is your best financial advice for another early-career PhD? And that could be something that we’ve touched on in the course of this conversation, or it could be something completely new.
45:50 Matty: So, I’ll stick with a similar theme. I mean, part of me hardly feels in a position to offer financial advice after the story I told, but what I would say is that, and I think this is especially applicable maybe for PhD students, is that if you are learning about some kind of financial topic, taxes, things like this, that you should ask stupid questions if you don’t understand something. I think PhD students, I certainly am, are on guard against wanting to sound stupid in, you know, seminars around professors, you sort of keep to yourself, you hide the things that you don’t know and try to present yourself in as best a light as possible, which is understandable. I get that, but I don’t think it works well with dealing with some of these topics. And, you know, everyone says, well, there are no stupid questions or you’re probably not the only one with the question, which is probably true, but I would add that even if you are the only one with a question, and even if it is a stupid question, that it’s better to humble yourself at the stage of learning something than to risk kind of misunderstanding and creating a much bigger problem for yourself down the road.
47:00 Matty: So, I guess it’s a sort of maybe I wish that I’d had a little bit more humility to ask questions and rather than just go along and pretend that I understood something at different, you know, workshops about taxes or things that I had been privy to in the past to actually just ask. And, and from there, I would’ve been in a better position. So, that’s what I would say.
47:25 Emily: I really, really love that advice. And I’ll take one final opportunity to plug my workshop, How to Complete your Grad Student Tax Return (and Understand It, Too!), PFforPhDs.com/taxworkshop. What I really like about this format, which it’s now like all these prerecorded videos, that’s probably the version that you went through as well, is that you can watch these videos as many times as you want. You can pause them, you can Google a term if I didn’t define it properly or whatever. You can take your time to really understand what’s going on. And then if you still have a question, show up at one of the many live Q&A calls that I hold for this workshop and just ask it there, because frankly, like asking me what you consider to be like a stupid question, I can probably answer it in like five seconds and it might take you an hour of reading other material to figure out what it is about your, like, misunderstanding at base that made you have that question.
48:14 Emily: So like, it’s just so much more time efficient <laugh> to enroll in something like my workshop and have access to me to ask those kinds of questions or, you know, whatever, work with another professional, that’s fine. But to just as you said, be willing to do it and have a person you can go to to ask those questions. That’s what I’m trying to provide with this tax workshop. So again, Matty, thank you so much for this interview. I think it’s been a harrowing story but really, really illuminating. I know it’s going to help a lot of people, because you are not alone, as you said. I made the same error, like it just didn’t get amplified in the same way yours did, but I made the same error. A lot of people make the same error. So thank you so, so much for sharing this.
48:50 Matty: Yeah, thank you so much for having me and again, for the work that you do with the podcast and the website. It was obviously extremely helpful to me and I’m sure it is to many others. So, thank you.
49:00 Emily: Yeah, thank you for saying that.
Outtro
49:07 Emily: Listeners, thank you for joining me for this episode! I have a gift for you! You know that final question I ask of all my guests regarding their best financial advice? My team has collected short summaries of all the answers ever given on the podcast into a document that is updated with each new episode release. You can gain access to it by registering for my mailing list at PFforPhDs.com/advice/. Would you like to access transcripts or videos of each episode? I link the show notes for each episode from PFforPhDs.com/podcast/. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Lourdes Bobbio and show notes creation by Meryem Ok.
