Hi
I came here in jan 2004 as J-1 Research scholar. Initially for few months the university withheld my federeal taxes but then stopped it. So when I filed my tax return 1040-NR for the year 2004 , the whole salary was exempted under the treaty and I also got the refund of the amount deducted for few months. Thereafter I styed on in 2005 as well as in current year. Since I have stayed more than 2 years , as per the treaty I filed my taxes for year 2005 but I need to know as to whether I am liable to pay taxes for the year 2004 since the treaty says the taxes are to be paid retroactively and how do I pay it.
Thanks'
Amit

Amit:

I believe that the research exemption is TWO years, not one, so the tax year 2005 is exempt as well. I cannot research it here, but check out IRS Pob 901 under India to see the duration.

Hi
You are right that the exemption is two years but it says that after 2 years the taxes are to be paid retroactively.. so I need to know what does retroactively mean... does it mean I got to pay back taxes.. I learned that one has to pay back taxes so I paid taxes for the year 2005.. can you let me know the meaning of retroactively...
Thanks
Amit

Amit:

Actually, the process is pretty simple. You get exempted from two years worth of taxes, based on the condition that you will be in country for ONLY two years. If you stay past two years, you have then violated the condition of the exemption, in which case the IRS will go back the two years you did not pay taxes and collect those two years of taxes. That is what "retroactively" means.

As long as you plan to stay for only two years, then you have met the criteria of the exemption and should not pay taxes. Amend your 2005 return using Form 1040X and ask for all the taxes paid back.

Hi
Thanks a lot for the information. Actually I have already lived for more than two years and I am currently in third year of my stay. That is why I filed my 2005 return. I just need to know as to whether I should now amend my 2004 return in which I took the benefit of treaty and did not pay any tax... If yes.. how do I amend it and whether I will have to pay penalty and interest etc.. thanks a lot..
Amit

Amit:

Okay, it seems amending your return is in order.

When you file the amendment (Form 1040X), explain the situation in detail, so all youwill pay is interest. No penalties should be assessed if you come forward. If you wait for the IRS to find you, however, then penalties (up to 100% of the tax) may be assessed.