“I confirmed with the IRS at the time that as long as the money was being used for tuition, it would not be taxed.”-----> I guess it depends; under IRS rules, if you're a candidate for a degree, grants and scholarships for tuition, fees, books, supplies and equipment are not considered taxable income. But grant money used for items beyond those, such as room and board, for example, are taxable.
“I have proof from TFA and LMU that this was indeed a grant that I was never in possession of, and yet an IRS agent told me this morning that because the 1099 didn't clear it as educational money, it may be taxable even if their was proof to the contrary. He didn't say that I would owe for sure, but I am confused as to why this is even a possibility.”----->As described above, as a candidate for a degree, you generally can exclude from income that part of the grant used for tuition and fees required for enrollment or attendance, or fees, books, supplies, and equipment required for your courses. However, you cannot exclude from income any part of the grant used for other purposes, such as room and board. For example assume that you receive a $6,000 fellowship grant that is not designated for any specific use. You are a degree candidate. You spent $5,500 for tuition and $500 for your personal expenses. You are required to include $500 in income on your return. Grants provided by the states are treated in much the same way as federal grants in terms of taxes. You must use the money for a qualified educational expenses or else it becomes taxable. If your grant is taxable, you might receive a W-2 for it. Otherwise, you will report the amount along with "SCH" on your 1040EZ or 1040/1040A form. Should you still have questions about the tax implications of an award, or youcan contact the grant sponsor. You can also query the IRS hotline at 1-(800)-829-1040.As logn as all of your grant was used ONLy for educational purposes, you may need to prove it by using tuition receipts other evidences/proof that you actually incur your educational expenses.