Hi,
Im a J-1 research scholar from India. I came to the US in 2007, and claimed tax treaty benefits in 2007 and 2008. Since 2009 I have been a resident for tax purposes. I have remained J-1 throughout, and never applied for immigration/green card etc. and plan to return to India this year.

I have read at several places that the tax treaty benefits are lost retroactively if a research scholar stays for more than 2 years, however I am quite confused by the tax treaty.

The technical explanation of Article 22 US-India tax treaty states that "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." Why "may"? Who is allowed exceptions?

Further the last para of Article 22, and the saving clause in Article 1 para 4(b) seems to suggest that if I have not tried to gain citizenship in the US, I am allowed treaty benefits.
Does this mean that I may not have to pay back the treaty benefit?

Thanks.

The "may" verb in the treaty DOES cause confusion for the Indian taxpayers who fall under this retroactive tax provision, but the IRS position on this matter is clear: if you stay beyond two years, you ARE subject to the income taxes retroactive to the date of your arrival.

I recommend you come forward voluntarily and make arrangements to pay the taxes. The IRS WILL figure it out eventually and then come looking for you IN INDIA to collect the back-due taxes, PLUS penalties AND interest. Under the tax treaty, the Indian government is obligated to collect these taxes on the IRS' behalf.

If you come forward, the IRS MAY waive the penalties, which will reduce your tax liability significantly.

If you need help filing the old tax returns, email me at [email protected] or [email protected].

Yes, its retrospective.

Thanks for the quick answers. That will be a lot of money to pay back, but I suppose I should have known and planned for it. :(

Do you think I will still need to file an amendment for 2007, since its over 3 years?

Also, apart from state taxes, is there any common deduction for J-1 nonresidents I can apply to reduce my tax for 2007 and 2008? I thought of adding moving expense for 2007 but do not have the receipt for air travel from India. :(

Regarding the receipt, contact the airlines; they can probably dig out a receipt for you even after 4 years.

Yes, the IRS WILL go back up to ten years if taxes are owed, which is clearly the case for you.