URBANA – A graduate employees' union is "thrilled" by the University of Illinois' plan to help graduate assistants shoulder unexpected tax-withholding costs this semester.

Graduate assistants due to have money withheld from their paychecks starting next week can get emergency grants from the university to cover the cost.

Meanwhile, the number of graduate assistants affected by the UI's failure to collect taxes on tuition waivers has dropped by more than a third since the UI acknowledged the payroll glitch last week.

The UI agreed Wednesday to temporarily raise the cap on its emergency student grant program to $2,200 this semester for any student facing "unexpected significant salary disruptions," according to spokeswoman Robin Kaler. Students ordinarily are limited to $500 a semester.

"We're thrilled," said Katie Walkiewicz, co-president of the Graduate Employees' Organization, which has been working with the UI to mitigate the impact on students. "I think this is amazing to see the university really trying to remedy this situation in the best way possible for students this semester."

The new $2,200 limit would cover all 172 graduate assistant affected by the tuition waiver tax this spring. The highest amount to be withheld from any student's check is $2,185 over the course of the semester, Kaler said.

"We certainly will be reaching out to the students who've been affected by this tax issue. But the program is broader than that," Kaler said, adding that a student doesn't have to be a graduate assistant to qualify for assistance.

A student who lost a job in the community might also be eligible, she said.

The emergency grants do not have to be repaid, she said. The UI does not have to withhold taxes, but the students will be responsible for paying any applicable taxes on the grants, she said.

The temporary expansion of the grant program won't extend to the fall semester, when the tax will kick in for more students.

"We're still worried about it," Walkiewicz said.

The UI hopes to have an updated emergency grant form ready in the next couple of days and will alert students via e-mail as soon as it's ready, Kaler said. Forms will be processed "as quickly as we can."

The university informed graduate students in February that the federal tax code required the UI to withhold taxes for the value of any tuition waiver above $5,250 for graduate assistants and pre-professional graduate assistants. The tax is not applicable to teaching assistants or research assistants.

Because of a payroll error, the UI had not withheld the taxes for hundreds of graduate assistants since 2003.

The university said last week that it would cover the back taxes through 2010 but would begin collecting 2011 taxes for about 280 graduate assistants on their next monthly paycheck, due March 16.

The UI initially said 17 students would receive no pay for the next three months because their accumulated 2011 withholding was greater than their expected income. More than 50 others were to see their paychecks cut by more than half.

Since then, however, the university found that more than 100 graduate assistants were "misclassified" and should have been considered teaching or research assistants.

Of the revised total of 172, 27 will see their checks reduced by at least half – including six who will receive no pay for the next three months– but 110 will see a pay reduction of 10 percent or less, Kaler said.

Also Wednesday, a UI spokesman said the tax-withholding oversight wasn't disclosed to the Internal Revenue Service until early February, more than a year after the university first discovered the problem. UI officials had said last week they reported it to the IRS after the problem came to light in December 2009.

The UI did begin withholding taxes for the Chicago and Springfield campuses in 2010, but failed to make the change at the Urbana campus.

"They thought that they had fixed it for the entire university," spokesman Tom Hardy said. "When they realized that Urbana had been left out of the equation, they got in touch with the IRS early in this year.

"In hindsight, it's something that should have been done," he said.

"We're in contact with them now, and in discussions trying to ascertain both what happened and how it will be corrected and how the tax liability will be handled."

UI officials still won't say how much they think the university owes the IRS. Hardy said it would be "counterproductive to come up with a ballpark guesstimate" that could prove incorrect.

IRS spokeswoman Sue Hales had no comment, saying federal disclosure laws don't allow the agency to discuss specific taxpayers, including the UI.

Some graduate assistants asked why the withholding rate will be 35 percent when many students will get the money back through tax refunds next year. The tax rate included a 30 percent federal tax, 5 percent state tax, and 5.6 percent for Social Security and Medicare, if applicable.

Hardy said the UI's interpretation of the tax code is that tuition waivers are considered "taxable fringe benefits," taxed at that rate.

Hardy also said the UI has no way of knowing if graduate assistants from years past may have paid the tax on their own when filing their returns, but he said it was unlikely. The UI doesn't include the value of the tuition waiver on W-2's, and graduate assistants probably weren't aware of the tax, Hardy and others said.