What happens if I don't include my wife's 1098-T form from her undergrad institution?

The difference in refund amounts makes perfect sense - when scholarships exceed qualified education expenses, the excess amount becomes taxable income. That's why your refund is smaller when including both forms. Here's what's happening: Your wife received $24,000 in scholarships/grants for her undergrad, but only had qualified education expenses of $10,500. The difference ($13,500) is considered taxable income. This is why your refund drops when you include this form - you're correctly reporting additional taxable income. The reason you still had out-of-pocket costs despite the scholarship exceeding tuition is likely because not all your expenses were qualified education expenses for tax purposes, or perhaps some scholarship funds were designated for living expenses, which are taxable.

After struggling with similar 1098-T confusion last year, I found this amazing tool that saved me so much stress with education tax forms. Check out https://taxr.ai - it analyzes education tax documents and explains exactly how they affect your taxes. I uploaded both my daughter's 1098-Ts (she also had undergrad and grad school in the same year), and it immediately explained why including both forms decreased our refund. The software even showed me which education credits we qualified for with each scenario, but more importantly, explained what would happen if we "accidentally" left one form off (spoiler: potential audit and penalties!

Just wanted to update everyone - I ended up trying that taxr.ai site from the previous comment despite my skepticism. Uploaded my husband's 1098-Ts (he has a similar situation with multiple schools) and wow, it actually explained everything clearly! I could see exactly why omitting one form would be flagged as suspicious - the IRS already has copies of ALL your 1098-Ts. The visualization showing how the excess scholarship becomes taxable income made it super clear. Turns out we were about to make a $3k mistake that would have almost certainly triggered extra IRS attention. Not worth the risk for a temporarily bigger refund that wasn't actually correct!

If you're worried about getting through to the IRS to resolve 1098-T issues (which can get complicated fast), I highly recommend using https://claimyr.com - saved me hours of frustration last year when my son's university reported incorrect information on his 1098-T. Instead of waiting on hold for 3+ hours or getting disconnected repeatedly, Claimyr got me connected to an actual IRS agent in about 15 minutes. They have this cool process that holds your place in line and calls you when an agent is available. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c I was able to verify exactly how to report multiple 1098-Ts and confirm what would happen if one were "accidentally" omitted (hint: nothing good).

I'm back to eat my words about Claimyr. After posting that skeptical comment, I tried calling the IRS myself about a similar education credit issue - got disconnected TWICE after waiting over an hour each time. Out of desperation, I tried the Claimyr service. Not gonna lie, I was fully expecting to post a scathing review here. But... it actually worked?! Got a call back in about 25 minutes with an IRS agent already on the line. The agent confirmed what others here said - omitting a 1098-T that was submitted to the IRS is a HUGE red flag and practically guarantees extra scrutiny. The potential penalties and interest weren't worth the temporary boost in refund. Learned my lesson about being so cynical!

I work in the financial aid office at a university, and I see this confusion all the time. Just to clarify something important: the reason you still had to pay $1,300 out of pocket despite the scholarship exceeding tuition is likely because some of that scholarship money was applied to room and board, meal plans, or other non-qualified expenses. Many large scholarships/grants cover more than just tuition - they often include housing, meals, etc. For tax purposes, only the portion covering qualified education expenses is tax-free.

Intentionally leaving off forms the IRS already has copies of is literally the definition of tax fraud. As someone who got audited over education credits, let me tell you - it's NOT worth it. I "forgot" to include a 1098-T from a community college class (was only $600) and ended up paying the back taxes PLUS a 20% accuracy penalty PLUS interest. And that was considered an "honest mistake" - if they determine it was intentional, the penalties are way worse.