@asr0415 , sorry for the delay in coming back to you.
(a) whereas article 22 of the US-India Tax treaty does indeed state that a research scholar whom is engaged in research for "public good" at an eligible university/ educational institute, and whom was a resident of India immediately prior to entering the USA, i exempt from US taxes for the first two years counting from the day of first entry. It also suggests that US may retroactively tax the income if the researcher overstays this two year period.
(b) Technical explanation from US Treasury/IRS also suggests that as long as the researcher does not change his/her status to a citizenship or GreenCard and because India is a developing country , the US will honor the treaty over the "saving clause ".
My struggle is this -- I have heard from EAs at IRS webcast ( not an official pronouncements of the US treasury or the IRS ) opine that this must mean that there MUST be retroactive taxation .
(1) While this is beneficial for the IRS, but unduly burdens the researcher because he/she has no idea whether his/her assignment will last/ take longer than the stipulated 2 years. This in effect would mean a negation ( likely negation ) of the benefit of the treaty --- because there is no easy path for recovery for the taxpayer ( one whom because of uncertainty chooses not to assert treaty benefits ).
(2) Also there is the issue of interest/penalty charges for non-payment when the researcher is extended ( through no fault of his own -- research project extended by and for the benefit of the institute / public) and therefore chooses to amend earlier filed returns ( most likely 1040-NR). Whom recompenses ?
(3) This retroactive / claw back taxation goes against the wording of the technical explanation of the treaty -- that US will essentially suspend the "saving clause" as long as the taxpayer is not a citizen or immigrant for article 22.
Because of these above concerns, I would take the position, I will depend on the "May" in the last sentence of paragraph (a) above. Since article 22 is unique among all the treaties I am aware of , is an exception to the OECD model and because there is nil tax court opinion I could find on this aspect, I will ignore the retroactive tax recognition through amended filing.
Note however, that IRS can always argue that while interest charges may appear injurious, but you have had untaxed income usage for at least two years ( and therefore may/could have earned interest ( thus negating the burden ).
However, I would hasten to add that this is my position and you have to make your own peace with the situation ( the pro and con analysis ). My references in this are the US-India Tax treaty and the Technical Explanation thereof by US Treasury. Please consider familiarizing yourself with the exact language and import thereof. See here -->
India - Tax treaty documents | Internal Revenue Service
Is there more I can do for you ?
