28 Jan My college student had income I didn’t know about. What now?

Q. I just found out my college senior has been earning significant income from a social media sponsorship that she never told me about. It means we completed both financial aid forms for the school and for federal loans that were not accurate and also she hasn’t paid taxes on that income for more than two years. I’m concerned because she hasn’t been saving any of the money — spending it as it came in, it seems — so there’s nothing to pay the back taxes and penalties I expect she will have. Plus, will we get in trouble for being dishonest with the school, which gave her both merit and need scholarships? Will we have to pay something back?
— Worried mom

A. That’s a lot to unpack.

So yes, your daughter has a lot to do.

First, on the tax side,

Regarding the tax issue, she should file the returns and do what she can to pay the taxes, said Steven Holt, partner and chair of the tax law, trusts and estates practices with Mandelbaum Barrett PC in Roseland.

He said the IRS will likely charge interest from the date that the returns were due and assess the penalties for failure to file and pay after it receives and processes the returns.

“These penalties are waivable for `good cause,’ such as reliance on a tax professional, illness or other causes,” Holt said. “Simply being ignorant of the tax filing and payment obligations is normally not good cause.”

He said the payor should have given her a Form 1099, which also would have been received from the IRS so it can act on its own and assess the taxes.

But the IRS will look more favorably if she files on her own rather than if it has to track her down, and she should find a tax professional to help her out so she can also take any available deductions, he said.

“If she is unable to pay due to resources availability, then the IRS is able to offer a payment plan,” he said. “There may also be state taxes due, depending on her state of residence.”

You said the income was “significant.”

It’s important to determine whether the income would automatically disqualify your daughter from need-based scholarships, said Arla Cahill, partner and chair of the education law practice group at Mandelbaum Barrett PC.

You should review the school’s policies on the qualifications for need-based scholarships to determine at what income threshold the student would have become ineligible for the need-based scholarship(s).

“The income that the student earned may be reduced by any applicable deductions that her tax professional may determine,” Cahill said.

You should speak with a financial aid representative from the school about amending their prior application responses based on the new information about the student’s income.

“Depending on the school’s written policies, it could be possible that all or a portion of any need-based scholarship monies paid by the school in excess of the disqualification threshold will need to be returned,” she said.

Good luck with sorting it all out.

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This story was originally published in January 2025. 

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.