I entered the US in August 2009 to start a 4 year BBA degree, to end on May 2013. Since the beginning I worked at my university. I have claimed the tax treaty benefits in 2009 and 2010. Now I am about to file my taxes for 2011 and saw this retroactive clause. I was told if I stay another year to work I will be responsible for all 4 years plus penalty and interest, unless authorities aggree otherwise.
Should I not claim the benefits for 2011 and pay tax? Would this help that I won't face the penalty and interest charges if I stay longer?
If I claim the treaty one last time, how could I figure out how much I'd need to pay if I stayed one year longer? Or how could I make authorities to agree otherwise?
Please help this is really urgent as federal tax return is due April 17.

The German Treaty exemption is $9,000.

Unless you KNOW you are staying beyond 2013, you should continue to claim it. You can always ask for a waiver of the clause.