I am a physician on J1 visa from India. I have been filing taxes for the last two years and have been getting federal tax exemption for last two years. This year will be my third year of filing taxes. My tax consultant told me that even though I am staying in US for more than two years, I don't need to file taxes for the first two years for which I claimed exemption. But from different forums, it seems that I do have to file federal taxes for he first two years. Please advise. It seems that if I do file, I will have to pay an interest to IRS and maybe a penalty.

This is from IRS Publication 901. Tax Treaties.
"An individual is exempt from U.S. tax on income received for teaching or research if he or she:
•Is a resident of India immediately before visiting the United States, and
•Is in the United States to teach or engage in research at an accredited university or other recognized educational institution in the United States for a period not longer than 2 years.
If the individual's visit to the United States exceeds 2 years, the exemption is lost for the entire visit.
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."

Since your visit has exceeded 2 years, the exemption is lost for the entire visit.

MukatA is correct in his analysis.

However, you were NEVER exempt from taxes to begin with.

As a physician practicing medicine, you are considered to be a TRAINEE, not a researcher, which means you SHOULD have been paying taxes all along as a non-resident alien.

You need to amend your returns for the past two years and attach properly-prepared Forms 1040NR-EZ and 8843 to the Form 1040X. If you did not file tax returns, you need to file Forms 1040NR-EZ and 8843.

If you want my professional help, double-click on my title above and scroll down to my profile/signature. You will find my email address and websites there.

Thank you for your help. Can you please tell me whether as a resident physician trainee on J1visa, should I get standard deduction or itemized deduction, and for how many years?

As a trainee from india on a J-1 visa, you ARE entitled to claim the standard deduction. Further, if you are married and have children, you can claim your wife and children as dependents on the non-resident Form 1040NR.

The J-1 visa for a trainee is good for TWO years, so if you have filed TWO non-resident returns (which, as noted, you MUST amend), THIS year, you will file as a resident alien.

If you want my professional help, double-click on my title above and scroll down to my profile/signature. You will find my email address and websites there.

Hi there, thanks for your reply. Do you know if we can claim personal exemption on j1 visa?

For first 2 years on J1, you file nonresident tax return and Form 8843. You get personal exemption and itemized deductions.

J-1 trainees from India get the standard deduction.