Background
In 1986 the Tax Reform Act substantially overhauled the Internal Revenue Code (IRC) and included a significant change to IRC §117 special tax benefit for students, a provision that governs the taxation of scholarship/fellowship grants, so that only tuition and directly related expenses were eligible for a tax exclusion. Shortly after, IRS ruled in notice 87-31 that a grant-making institution was not required either to withhold tax or to report to the IRS any scholarship/fellowship payments, taxable or not to the student, that were made to U.S. citizens and permanent resident aliens. However, the ruling did not apply to institutions that made payments to international (non-resident aliens) students. So, payments of scholarships or fellowships made to international students are subject to U.S. tax reporting and withholding, unless there are treaty benefits available and formally claimed.
Payments of scholarships, fellowships, and grants paid to students who are U.S. citizens, resident aliens, and non-resident aliens who have met the substantial presence test (RAfTP) are not reportable by the University to the IRS and are not subject to tax withholding. However, these students will need to make the determination themselves whether the scholarships should be reported on their personal tax returns. See IRS Publication 970 https://www.irs.gov/pub/irs-pdf/p970.pdf and IRS Publication 515 https://www.irs.gov/pub/irs-pdf/p515.pdf
