I was on H1-B visa until July 19 2007, after that it was converted in to F-1 visa.

For the year 2007, I used online tax filing service to file the tax return.

Along with the online tax return, I also submitted a paper copy of form 843 to the IRS to claim approximately $900 return from IRS. This is the amount of tax that IRS has withheld for social security from my salary when I was employed under H1-B.

Now, I have received a letter from IRS stating that they have rejected my claim (case) to refund my social security tax withheld, because I filed a 1040A instead of 1040NR.

Please let me know what I can do in this scenario. Any help would be greatly appreciated.

NOTE:
Initially I had contacted my former employer to refund the money, but they suggested that I should take this matter directly to IRS, because for a employer it is a long and tiring process to get that money back from IRS. At the time of filing, my employer had provided me with a letter stating that I need to collect the withheld amount from IRS.

You were on H1-B until July 19, 2007. May be you also filed resident return for 2006. You filed resident return for 2007. So you are not exempt from FICA taxes. You will not get it back.

I have to disagree with MukatA on this one.

You filed INCORRECTLY for 2007, so you CAN fix this by amending your 2007 return from a resident alien return to a dual-status return. You would have to file Form 1040X, detailing the mistake you made by filing as a resident alien and requesting that they reinstate your non-resident alien status effective on 19 July 2007, and attaching a properly-prepared Form 1040NR (dual-status return) with a Form 1040 (dual-status statement). You MAY have to pay some additional tax with this amendment.

Once the IRS accepts the amendment and reinstates your non-resident alien status, you can then re-submit the Form 843 requesting the refund of the Social Security and Medicare taxes, attaching a copy of the amended return and the IRS acceptance of the return as proof of your non-resident-alien status.

The only roadblock to this process is if you filed the 2007 return as Married Filing Jointly. The IRS tends to look at the Married Filing Jointly decision as irrevocable. However, if you are single, you should have little problem resolving this issue.