I am a J1 Visa holder. I have signed the tax treaty. I joined on 15th November' 2006.
I am going to resign on 13th November' 2008. Can I stay one more week in USA without paying back TAXes (being a Tax treaty) . I have valid Visa till 15th december' 2008.

I was away from USA for 2 months in this period (15th Nov' 2006 to till date).

I need this answer urgently. Thanks in advance

Your country? Are you a researcher?

Thanks a lot for quick response.
I am from India and researcher ( Post Doctorate fellow)

Yes, you can stay the extra week. You have met the spirit of the two year rule by resigning prior to the two-year anniversary of your arrival.

The IRS is NOT going to impose the tax retroactive if you stay a few extra weeks to take care of personal issues and clear your apartment before returning to your home country.

You can even take a few weeks to tour the country if you want.

Thanks. It is very helpful for me

Glad to help!

I think you might need to be a little more careful here on some of the treaty interpretation.

First, the 2 years begins from the time you entered the US, not when you started working.

Second, the treaty refers to physical time in the US (2 years) not time worked.

I'm not arguing whether you will/will not get 'caught' by the IRS. I'm looking at what the treaty (ie law) says.

TTE:

Noted! But my advice is based on a conversation I had with an IRS representative from the International Tax Hotline. He noted that internal memoranda allowed for additional time in country for administrative matters like moving and vacationing with no tax consequences.

Ok, it means aftre resign... I can stay few more days to do other necessary things.

In any sense, I am resigning before that mentioned date.

Yes, that is exactly what it means!

It is always good to try to obey the "letter" of the law, as you never know how a particular IRS employee may react to the circumstances presented to him or her.

That said, the general attitude of the IRS would be to allow you the extra time to take care of necessary details of moving without penalty.

ATE, neither you nor Spayra can rely on conversions with the IRS. If the agent auditing Spayra were to read the Technical Explanation to the U.S.-India Income Tax Treaty, the agent would find:

The exemption from tax applies for a period not exceeding two years from the date he first visits the Contracting State (the “host State”) . . . 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.


Just as with any deviation from the letter of the law, you may not get caught. However, that is not a sufficient reason to advise someone that the law provides differently.

I assume you mean conversations.

I disagree with your interpretation in this case. I noted the date and time of the conversation and name of the IRS representative, and have used such citations in negotiations with the IRS, though not on THIS specific issue.

While I grant you that the IRS can repudiate the guidance of its own representatives, I have found that most IRS agents take a holistic attitude when it comes interpretation of tax treaty provisions. Most agents look at the INTENT and SPIRIT of the law, not the LETTER.

Spayra clearly intends to meet the spirit of the law by stopping work before the two year period. He may even leave the country before the two-year time.

Given these facts, it is counter-productive to frighten him into thinking he MUST be on that plane before the two-year time is up in order to avoid paying two years' worth of taxes retroactively.

If he leaves by 15 Dec 08, he will NOT be in violation of the provisions of his visa and, in 99.9% of the time, he will NOT be expected to pay any retroactive taxes. To say otherwise is just plain WRONG In my opinion.

My reading of the letter, intent, and spirit of the treaty is that "the exemption from tax applies for a period not exceeding two years from the date he first visits the" United States. I saw nothing in the treaty or the explanation of the treaty that discusses the period that he works in the U.S. Therefore, the date Spayra quits his job would have nothing to do with the analysis. Further, the analysis would have nothing to do with when his visa expires. Rather, the analysis would depend on whether he has left the U.S. by Nov. 15, 2008.

The approach of using a fixed time in the treaty is consistent with other U.S. residency rules that have nothing to do with employment status. Under the substantial presence test you do need to be working in the U.S. at all to become a U.S. resident.

ATE, where are you gleening this "spirit" of the treaty? From an IRS agent on the phone? The IRS is wrong in about 1 out of every 5 questions it answers over the phone. http://www.gao.gov/new.items/d0651.pdf (page 26 of 57).

I am not trying to scare Spayra; I am trying to make sure he understands what the law is and that if he doesn't leave the U.S. by November 15, 2008 that he may be taxed on his worldwide income for all of 2007 and most of 2008.

IntlTax:

This is an issue we will have to just disagree.

TTE and I had a similar disagreement last year which eventually resolved itself.

Fair enough.

Int'l Tax is right. The Treaty is very clear that the exemption from US tax applies for a two year period and that period is not tied to the employment period. If a person arrived a month before they began the employment, the clock would still begin running from the day that they entered the US.

ATE's point is that the IRS tends to be lenient on how strictly the treaty requirement is enforced. That's fine, and that's worth mentioning but that is an act of grace and is not guaranteed by law.

You are both correct that the law is clear about the two-year time limit.

However, I also know that the IRS allows extra time for moving, shipping of personal effects, etc.

For this reason, I am going to ask the IRS for clear guidance in writing about allowing a "grace period".

I will look forward to hearing the result. I seriously doubt the IRS is going to give you anything in writing. The law is clear - whether they enforce it or not is a matter of grace and I doubt they will give you a firm commitment in writing (in fact, I believe that they would be wrong to do so).

TTE:

Keep in touch by email. I will be sending the letter for guidance late next week, and do not expect an answer until well into next year.

I recently came across Rev. Rul. 69-236 which deals with the topic discussed above. This revenue ruling provides in full:


The Internal Revenue Service has been asked to clarify its position in situations where foreign professors or teachers who are residents of tax treaty countries temporarily visit the United States for the purpose of teaching at a university, college, school, or other educational institution.

All income tax treaties presently in effect, except the treaty with Trinidad and Tobago, contain articles that set forth the conditions for income tax exemptions for professors or teachers on the remuneration for such teaching. The exemption applies to remuneration earned during a period not exceeding two years from the actual date of the individual's arrival in the United States for a purpose stated in the applicable treaty article except that the article in the Greek treaty provides for an exemption for a maximum period of three years.

The exemption applies to remuneration earned by the visiting professor or teacher during that two or three years, whichever period is applicable, even though the total period of his presence in the United States extends beyond such period. Except as otherwise provided in the treaties with Austria, France, Italy, and Japan, the exemption terminates if the visiting professor or teacher becomes a resident of the United States before the expiration of the two or three years, whichever period is applicable. The exemption remains applicable, however, as to income earned during the period prior to the date he becomes a resident.

I looked at the 1984 U.S.-Italy Income Tax Treaty (not a treaty in effect back in 1969 when Rev. Rul. 69-236 was published, but a treaty with one of the countries specifically mentioned in the ruling). The Technical Explanation to the 1984 U.S.-Italy Income Tax Treaty provides:

It is possible that an individual who meets the qualifications of this Article, including the requirement that the visit be “temporary” may remain in the other State longer than two years, in which case the exemption applies for the first two years of the visit.

On the other hand, the Technical Explanation to the 2001 U.S.-U.K. Income Tax Treaty provides:

If the two-year period beginning from the date of his arrival is exceeded, the exemption will be lost retroactively. Thus, if a person comes to a Contracting State for the purpose of teaching and stays for a period in excess of two years, the exemption will not apply for the first two years.

From these examples, it is clear that the rule differs from treaty to treaty. As indicated in a prior posting above, under the U.S.-India Income Tax Treaty "[i]f 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.. . " (Emphasis added). This seems to give the U.S. the "option" to subject the professor or teacher to tax retroactively.

Great! This makes my letter to the IRS unnecessary.

ATE,

I don't believe this changes anything at all in the prior discussion. The US- India treaty technical explanation gives the US the right to tax the income retroactively if the person exceeds the two year period.

The 'may' in my view does nothing to change the situation. It is simply the same as many of the other articles (for example, Art 11 says that each state 'may' tax the income -- i.e. each has the right to tax).

As much as I dislike quoting from IRS publications, Publication 901 states quite explicitly for visiting professors under the India treaty:

"If the individual's visit to the United States exceeds 2 years, the exemption is lost for the entire visit."

Okay, then the tax letter is back on.

ATE, how can a tax letter possibly be required? What more proof do you need?

In essence, you are asking for IRS grace. The taxpayer is over by a few days so you want them to simply not enforce the law. Although that is fine in an individual instance, I would think it would be foolish of the IRS to commit itself to a specific 'grace period.' Moreover, any such 'commitment' you receive in the letter could never be relied upon, which means it is a pointless exercise.

I am increasingly disillusioned with this website.

You are probably right about it being a pointless exercise.

And you are also right about the "letter of the law". If the IRS chooses, they could require Spayra to pay the two years worth of taxes if he stays in country past the two-year time.

In the final analysis, however, I just do not think that would happen. The spirit of the law allows for the judicious use of judgement by the IRS in their enforcement of the law. Spayra clearly is NOT attempting to work additional time under the two-year exemption, but rather just needs some extra time to properly tie up some loose ends before leaving the U.S. to return to his home country.

To tell him that he MUST leave prior to 2nd anniversary of his arrival or he will definitely be liable for two years' worth of taxes is just as bad as saying he can stay as long as he wants! Some judgement must be applied with the advice given, or else the website loses its value to the clients who are seeking guidance in a tax system that is totally foreign to them.

I don't have a problem with you pointing out that the risk of the IRS taking issue with an individual who exceeds the 2 year period by several days/weeks might be quite low.

However, I think it is important that the OP be informed of the treaty requirements and that there is no 'grace period' provided by the treaty. If the OP chooses to take on the risk, that is his call. From our side, however, we need to ensure that we accurately report the legal requirements and not imply a level of certainty that does not exist.

You correctly pointed out in the post above that technically the OP could be held liable for taxes on 2 years' worth of income. That's a big risk for you to expose him to because you 'think' it is unlikely the IRS would enforce it. By all means tell him that you think the risk is low but it is irresponsible not to inform him of the legal situation and the risk (however small) that he might be taking on.

TTE:

You bring up some valid points.

For those reasons, I will modify my posts henceforth when I factor in opinion and experience in dealing with the IRS.