Ask Me Help Desk - Tax Treaty benefit - wasn't aware of the 2 years maximum stay

Hi everyone,

My situation is quite complicated and my questions will not be the easiest to answer. However, I would appreciate any input.

I'm a research scholar currently holding a J-1 VISA. I'm from Thailand. I entered the US in 2010 and I'll complete my 2-year stay this April 2012.

For the past two years, I have been granted tax exemption due to the Tax Treaty benefit between the US and Thailand. However, when I casually emailed the University tax department to ask if I am to be paying tax now that I am going on my third year. Their answer was not what I wanted to hear.

They said, my understanding was wrong. I thought/assumed that the benefit would be for the first two years of my stay and if I were to stay longer, I'd have to start paying taxes then. But they said, the tax treaty is granted for the maximum of 2-year stay TOTAL. Meaning, if I were to extend, I will have to pay backtaxes starting from the very first dollars earned back in 2010!

Of course, they apologized profusely for not notifying me in the first place before I signed the treaty form. But it's a little too late now.

I consulted with the University tax department and they said I have two options:
1) Pay backtaxes - that would mean the principal for year 2010 and 2011 (whatever I owe for Federal, State, and County taxes) PLUS interests PLUS penalties
2) Simply leave the country - not have to pay anything - very tempting but difficult to do - please read on

My boss has agreed to increase my salary to help the matter, by not much, but still appreciated. My problem is I don't have that sum of money to give back to the IRS at once. The principal alone would already be at the range of $15,000. And I know that the IRS interests are compounded daily. I don't even know where to begin to do the calculation. If I end up staying, I'd have to do the installment payment thing with the IRS which I dread because I may end up paying way much more than I owe.

I really don't want to leave the country just yet either because my research is going really well and I just don't want to abandon my work half way. The last two years of hard work would go to waste if I leave now. I have a job waiting for me in Thailand but I'm not looking forward to it because it pays less than what I'd get here and it's not exactly the field I have expertise in.

What I want to do is to stay, save up some money, finish my work, get a few publications out, THEN move back. But what if I can't afford paying backtaxes, even in installments.

So now my question is (sorry for the long introduction of my situation), is there a way to negotiate with the IRS at all so that I don't have to pay interests and penalties? Because this is not exactly my fault. I wasn't planning on not paying taxes. I honestly wasn't aware. If I had known from the beginning, I'd have been more than willing to pay full taxes just like everyone else. And would the IRS ever consider a deal where I wouldn't have to pay every dollar I owe?

Thank you so much for reading this far. I hope you can give me some advice/suggestion.

This is from IRS publication 901. Tax Treaties.
An individual who is a resident of Thailand on the date of arrival in the United States and who is in the United States for not longer than 2 years primarily to teach or engage in research at a university, college, school, or other recognized educational institution is exempt from U.S. income tax on income for the teaching or research. The exemption from tax applies only if the visit does not exceed 2 years from the date the individual first visits the United States for the purpose of engaging in teaching or research.
This exemption does not apply to income from research carried on mainly for the private benefit of any person rather than in the public interest. This exemption does not apply if, during the immediately preceding period, the benefits described in treaty Article 22(1), pertaining to students, were claimed.

MukatA seems to covet the critical issue: you WILL be liable for the past two years' taxes retroactively.

You can set up a payment plan and ASK to have the penalties waived. Your chances for waiver are pretty good, and the IRS interest rate is a very reasonable 8%.

Look on my profile for my email addresses if you want professional help with this.

Thank you so much AtlantaTaxExpert. I just have one more question to ask. Is the 8% interest compounded daily? I guess I don't quite understand how interests are calculated. For example, if I owe $10,000, with interest I'd have to pay total $10,800. Is this correct?

OR the 8% is recalculated every time I make a payment, and compounded daily?

Thank you so much.

Now I have the same problem! I'm also a Thai postdoc working in the University. I hope you have already figured this problem out. Could you please give me some advices on this? Did you go back to Thailand or you have paid those 15K?

Thank you so much!

Just reviewed the Technical Explanation, which implies that you must pay the tax retroactively if you stay beyond two years.

Hence, either return to Thailand for at least a year or pay the $15K in taxes.

Thank you for quick response! But do I need to pay the tax right away at 2 years? Or I need to pay after the end of the third year?

Thank you so much!

Quote:

Originally Posted by arikit

Thank you for quick response! But do I need to pay the tax right away at 2 years? or I need to pay after the end of the third year?

Thank you so much!

Hi Arikit!

Actually no, I didn't go back to Thailand. And if you are thinking about going back, depending on your VISA, if it's a J-1 like mine, usually you will be subject to a 2-year rule home country (212e; I've never heard of 1 year).

But if you want to try my route, it's actually pretty simple. Here's a rundown of what I did.

Basically I made a deal with the IRS through what it's called an "installment agreement" where you pay back the taxes you owe on a monthly basis. You get to choose what day of the month, how much to pay, and from what account (saving/checking). You will need to download the installment agreement form, fill it in, send it along with the 1040X (double check this one, it's been a while) and a statement saying why you haven't been paying the taxes. Once they review and hopefully grant your case, they will mail you a letter saying that they accept your request and then all you have to do is bascially make sure you have enough money in your bank account for the IRS to deduct on that date. The interest rate wasn't that bad at all for me, much much lower than I had expected in fact.

I'd advise you to do this as soon as possible though, don't wait another day because another day means more interests you have to pay. :)

I hope this helps! If you have any more questions, feel free to ask. Good luck!

Edit:
I forgot to mention that the above information is for the Federal tax. For State tax, they don't do installments (at least for my State, double check yours), so I paid all that I owed right away through a credit card (it wasn't much). You still may want to send them the same statement explaining why you haven't been paying taxes though. They will send you another letter telling you how much you owe and then you can pay online.

Hello Alogix,

Thank you so much for all those suggestions! :)

Quote:

Originally Posted by alogix

Hi Arikit!

Actually no, I didn't go back to Thailand. And if you are thinking about going back, depending on your VISA, if it's a J-1 like mine, usually you will be subject to a 2-year rule home country (212e; I've never heard of 1 year).

But if you want to try my route, it's actually pretty simple. Here's a rundown of what I did.

Basically I made a deal with the IRS through what it's called an "installment agreement" where you pay back the taxes you owe on a monthly basis. You get to choose what day of the month, how much to pay, and from what account (saving/checking). You will need to download the installment agreement form, fill it in, send it along with the 1040X (double check this one, it's been a while) and a statement saying why you haven't been paying the taxes. Once they review and hopefully grant your case, they will mail you a letter saying that they accept your request and then all you have to do is bascially make sure you have enough money in your bank account for the IRS to deduct on that date. The interest rate wasn't that bad at all for me, much much lower than I had expected in fact.

I'd advise you to do this as soon as possible though, don't wait another day because another day means more interests you have to pay. :)

I hope this helps! If you have any more questions, feel free to ask. Good luck!

Edit:
I forgot to mention that the above information is for the Federal tax. For State tax, they don't do installments (at least for my State, double check yours), so I paid all that I owed right away through a credit card (it wasn't much). You still may want to send them the same statement explaining why you haven't been paying taxes though. They will send you another letter telling you how much you owe and then you can pay online.

Most states WILL set up a payment plan if you tell them you cannot pay it all at once. You submit Form 9465 to the IRS to set up the federal payment plan.