I have been on F1 student visa since 1999 to 2005. I was working on OPT in 2005, until I changed my status to H1 in August 2005. I claimed refund of 2005 FICA taxes with IRS which disallowed the refund, claiming a 5-year limit on students (claiming I would only be eligible in 1999-2003 years). This seems to be in contradiction to IRC Sec.7701(b)(5)(E)(ii), which says there are exemptions to this 5-year rule (see full text below). (I've also filed Form 8840 to establish my closer connection to a foreign country.) Do I interpret things correctly that I'm still eligible for FICA taxes refund? How can I convince IRS to give it to me?

As a side note, the IRS agent with whom I discussed my case keeps insisting that their rules don't allow for exemption (although this agent also claims she follows the internal rules, and NOT the Internal Revenue Code which she doesn't need to read or to know). This seems strange, and I think the IRC should definitely override any internal IRS rules, manuals or opinions that may be available to the agents.

What is a possible course of action for me to pursue in this case?

<quote from IRC Sec.7701(b)(5)(E)(ii) [source: http://www4.law.cornell.edu/uscode/uscode26/usc_sec_26_00007701----000-.html]>
(ii) Limitation on students For any calendar year after the 5th calendar year for which an individual was an exempt individual under clause (ii) or (iii) of subparagraph (A), such individual shall not be treated as an exempt individual by reason of clause (iii) of subparagraph (A), unless such individual establishes to the satisfaction of the Secretary that such individual does not intend to permanently reside in the United States and that such individual meets the requirements of subparagraph (D)(ii).
<unquote>

Sorry, I have to side with the IRS on this issue, because your argument that you maintained a closer connection with your home country was undermined by:

1) the long duration of your stay. Most students finish their studies in five years; you stayed for SEVEN years.

AND

2) the fact that you applied for and received an H-1 visa. That, by itself, completely undercuts any closer connection argument you made in previous years.

Thanks so much for your answer, AtlantaTaxExpert!

Some comments to your response:

1) I was a graduate student, and although I finished in 5.5 years (by the end of 2004), I was one of the first to graduate in my class, with typical duration of studies in my field being more than 6 years. So I don't see how most students finish in 5 years (unless you meant college students)

2) I think you should agree that the fact of receiving H1 visa is not an establishment of an intention to permanently reside in US, esp. since H1 is a temporary visa still, with a max duration of 6 years (even after extensions). Further, even if there's a view that it may be considered to indicate my intention to reside in US, it still shouldn't apply to the period preceding my application for H1, which didn't happen until August 2005. So even if I can't be exempt for the period Aug-Dec 2005, I still can be exempt for Jan-Jul, which gives me an exempt status for more than half a year and subsequently I wouldn't pass a substantial presence test.

Would you agree or disagree with these arguments? Do you think I can successfully argue with IRS (and if necessary in courts) about the issue on the basis of these arguments?

Sorry, the IRS does not see it that way. Once you applied for and received the H-1 visa, you effectively sabptaged any chance of arguing that you have maintained a closer connection to your home country.

You are welcome to try to make the argument, but I doubt you will be successful.

Whether you actually intend to permanently reside in the United States or not is not the question. The question is whether you can
[establish] to the satisfaction of the [IRS] that [you do] not intend to permanently reside in the United States.

If the IRS isn't happy with your position, you lose.