and if I am supposed to but I don't report it to the IRS...what happens?
Per IRS Publication 970 - Tax Benefits for Education:
"Whether you must report your scholarship or fellowship depends on whether you must file a return and whether any part of your scholarship or fellowship is taxable.
If your only income is a completely tax-free scholarship or fellowship, you do not have to file a tax return and no reporting is necessary.
A scholarship or fellowship is tax free only if:
You are a candidate for a degree at an eligible educational institution, and
You use the scholarship or fellowship to pay qualified education expenses.
"If all or part of your scholarship or fellowship is taxable and you are required to file a tax return, report the taxable amount..." You must report the taxable amount whether or not you received a Form W-2. If you receive an incorrect Form W-2, ask the payer for a corrected one.
For information on whether you must file a return, see Publication 501, Exemptions, Standard Deduction, and Filing Information, or your income tax form instructions.
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