J1 Research Scholar- Retroactive Tax- Repayment Advice

[sabya3112]

Hi,

Need some tax advice.

Need advice. I am an Indian citizen, currently on a J1 research scholar visa (since 2018) in the USA, working at a University. For the year 2018 and 2019, I had a tax treaty applied to my paycheck, which made me exempt from paying federal income tax. The tax treaty had a retroactive clause (pay back all of that federal tax if you stay in the US over 2 years, i.e., pay back the tax for 2018 and 2019 in my case). Now since I am in the USA for over 2 years, and planning to stay longer, I need to pay back the tax I owe as soon as possible. Does anyone have any experience with this, and please share it in that case? I assume I need to submit form 1040X but I'm not sure what else. Also, do I need to pay interest/penalty?

Many Thanks.

[pk]

@sabya3112 , the US-India tax treaty only allows a J-1  researcher to exclude certain US based income for up to two years and therefore  be taxed as a US person.  Note that since you are not an exempt person, you will be ( thereafter) taxed as a Resident for Tax purposes.  The treaty does not have any retroactive clause ( in fact none of the treaties  that I am aware of nor the model treaty docs ) and therefore there is no claw back of presumed taxes for the  years that were excluded.  Therefore I do not understand  your concern -- please add more details as to why you think there is a claw back due .

Namaste ji

pk

[pkm4]

The technical explanation of the Indo-US tax treaty says this in the fourth para of the article 22:

If a professor or teacher remains in the host State for more than the specified two-year period, he may be subject to tax in that State, under its law, for the entire period of his presence.

Although the article 22 of the tax treaty does not have any retroactive clause but its technical explanation makes this confusion.

[DaveF1006]

To clarify, have you been in the US for more than two years but never claimed an exemption from US taxation?

@pkm4

[pkm4]

@DaveF1006 

I have been in the US for more than two years and claimed exemption from the taxation two times. Now, the question is related to this thread. Do I need to pay taxes retroactively for the previous years also?

[DaveF1006]

To clarify again, where you a J1 scholar?

@pkm4

[pkm4]

@DaveF1006 

yes, J1 research scholar

[DaveF1006]

 Although there isn't an official IRS document that makes this clear, according to this website, in India, If your visit to the United States exceeds two years, the exemption is lost for the entire visit. This seems to be in accordance with article 22 of the tax treaty that you have listed above.

You may need to amend previous year's returns to claim your US taxable income in accordance to these rules. To clarify, please let me know what day you entered the US to begin your studies?

@pkm4

[pkm4]

Thank you @DaveF1006 . I got the reply. Amendment of the previous year's return is the answer.

[pk]

@pkm4 , the reason for @DaveF1006 's question as to when you entered the country under J-1 visa  is that depending on exactly when you entered / admitted with J-1,  one hopes that you are just shy of two years and therefore can leave the country for a reasonable  period of time, enter with a NEW visa and thus avoid the retroactive bite.   This is two years  and not two calendar years ( if my memory serves me right ).  Just a thought

pk

[Gourav039]

@DaveF1006 @sabya3112 @pk @pkm4 

I am also in a similar situation and couldn't find any official IRS doc regarding the loss of the US-India tax treaty exemption for the entire visit after 2 years.

My Case:

I am on a J1 visa (research scholar category, started in April 2019) and file tax for 2019 and 2020 as a non-resident. In my previous tax filings (1040NR), I claimed tax treaty benefits on my income under the US-India tax treaty. The treaty benefit ended in 2021 (2 years completed in the US, now a resident alien for tax purposes), and I am still in the US and continuing my program.

Now, as per the tax-treaty doc, ARTICLE 22 (Payments Received by Professors, Teachers, and Research Scholars), "If a professor or teacher remains in the host State for more than the specified two-year period, he may be subject to tax in that State, under its law, for the entire period of his presence."

Does it depend on the payer's wish, or do we have to pay it according to the law (no official docs)? 

Can you please suggest? 

[pk]

@Gourav039 , while I recognize that this "cautionary note " is only in the technical  explanation and NOT in the body of the  treaty, it is not mentioned in the IRS language regarding J-1 aliens.  There is no mention of this claw back anywhere that I can find except  for the ref'd  technical explanation.  Additionally if indeed IRS chooses to exercise " may clause" and  wants all the  excluded income taxed, whom is going to pay the penalties  and interest charges ---  so it is going to be  a can of worms.  Thus I think this is moot point i.e. there is no claw back.  As a J1-Alien you file a 1040 from the day you pass the Substantial Presence Test and  after passing the two year tax holiday under the treaty, just pay the normal taxes and go forth.  So I would NOT worry about the possibility of claw back. 

Does that help ?   Is there more I can do for you ?

[pkm4]

@pk @Gourav039 This case is discussed in the following webinar https://www.irsvideos.gov/Webinars/TaxTreatyBenefitsforNRANonResidentAlienIndividuals?l=en-US

There is no scope for confusion now.

[siddharthbhandari]

Hi @pkm4 

 I am in a similar situation. I have stayed in the US past the intially planned two years (2021-22).

How did you amend your taxes? Did you have to pay interest or other penalties?

Did you wait for the IRS to give you a notice?

Appreciate the help.

[DaveF1006]

To clarify, did you arrive in 2021 as a J1 research scholar and are still living here? Did you file a 1040 NR for years 2021-2022? 

@siddharthbhandari