MaxMcNally

I managed to get it to work by adding a filter instead of an action –

add_filter('wp_insert_post_data','create_taxonomy_callback');

and here is my callback function –

if($data['post_type'] == 'revision' || $data['post_status'] == 'auto-draft') {
			//Ignore revisions
			return $data;
		}

		if($data['post_type'] == 'villagelife' && !term_exists( $data['post_title'], 'villagelife' )){
			wp_insert_term(
			$data['post_title'], // the term
				  'village' // the taxonomy
			);
		}

Hope that helps!