The IRS is after me!

I got a package in the mail from the lovely IRS today. I send them a letter back in March in response to an inquiry about my (unfiled) tax return for 2004. Which is interesting, because back in early 2005, I read the miniscule font of their 2004-1040 Instructions manual until my eyes hurt to make sure I didn't have to file. But they're saying that I am mistaken, and they even included a slim two-pager titled, "Information About Your Notice, Penalty, and Interest."

Hmm.

I'm posting this to clear my thoughts and also to get advice, if any of you folks out there read it and want to clue me in as to where my logic went wrong... by all means, email me or leave a comment!

I earned $1,018 in wages in 2004. Then, I won a Light Fellowship and was running around China for six months. The fellowship awarded me $17,570. Certainly, if all of this were taxable, I owe the IRS a big fat check. However, all of it isn't taxable! On page 19 of the Instructions manual it clearly states:

Scholarship and fellowship grants are not reported on Form W-2. Also, enter "SCH" and the amount on the dotted line next to line 7. However, if you were a degree candidate, include on line 7 only the amounts you used for expenses other than tuition and course-related expenses. For example, amounts used for room, board, and travel must be reported on line 7.

Cool. I think I get it. Now as I turn back to my handy-dandy LightFellowshipBudget.xls, it tells me that of the total, $13,380 was used for tuition, paid to Princeton-in-Beijing and Associated Colleges in China. That leaves $4,190 as taxable. Add in the wages I earned and that brings me to a total of $5,208 in taxable income for 2004.

Turn to "Chart A - For Most People" on page 12 of the Instructions booklet. There it states, if my filing status is single, and my gross income is less than $7,950, then I need not file a tax return. Ah-ha! Clearly, it must be that "gross income" includes all sources of income, and that's where the catch is, right? Wrong! I read the fine print under the two asterisks and it says, "Gross income means all income you received inthe form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States." (Emphasis is mine.) But the tuition portion of my fellowship is not taxable, so it's not included in my gross income for the year.

Or is it? I'm not arrogant or confident enough to think I must be right, but I'm also irritated because the tax code is so complicated. There is definitely a chance I've missed something, and I consider myself a careful and attentive reader. This whole ordeal is proof that they need to revamp the whole thing and make it easier for everybody.

Anyway, there it is, the scary envelope from the Internal Revenue Service staring up at me from next to my laptop. I'll call them later and hopefully speak to someone who knows what they're talking about, and clear up this mess so I don't have horrifying nightmares about being grouped together with the likes of Martha Stewart.