Hi,
I am on F-1 Visa and working in US company during my OPT. I filed my tax for 2012 and IRS withheld my tax refund stating:
The Article 21 India - US tax treaty only exempts the income that is not from a US entity and since I am working for a US company, the remunerations are taxable.

I am confused about the situation now because all my friends received refund with same situation and only I am the one who didn't get the refund instead they asked me to pay a penalty.

Please help

The article from the treaty that is relevant in your situation is Article 21.

Paragraph 1 clearly states that you are exempt for payments for education/maintenance/training that arise outside the US.
So payments that you receive from a US source are taxable to you.
Paragraph 2 states that you are allowed to use the same exemptions/reductions on your tax return that residents are entitled too. So you would be allowed to use the standard deduction which non-resident aliens are not eligible for.

The IRS doesn't check all returns. So if your friends are really in the same situation as you, they filed a wrong return and should amend their returns.


ARTICLE 21
Payments Received by Students and Apprentices
1. A student or business apprentice who is or was a resident of one of the Contracting States
Immediately before visiting the other Contracting State and who is present in that other State principally
For the purpose of his education or training shall be exempt from tax in that other State, on payments
Which arise outside that other State for the purposes of his maintenance, education or training.
2. In respect of grants, scholarships and remuneration from employment not covered by paragraph
1, a student or business apprentice described in paragraph 1 shall, in addition, be entitled during such
Education or training to the same exemptions, reliefs or reductions in respect of taxes available to
Residents of the State which he is visiting.
3. The benefits of this Article shall extend only for such period as may be reasonable or
Customarily required to complete the education or training undertaken

Eventually, the IRS WILL catch up with your friends, and it would be better for them to come forward and pay the taxes that are due, because the penalties get worse as time goes by, and the interest compounds to the point that they may pay 2-3 times MORE than they would have had they filed correctly.