[Rutax]

Hello,

I'm a Russian graduate student who was in US on an F-1 visa since 2005. In 2005 I had a fellowship, later in 2006 I became a Graduate Student Researcher (research assistant). That paid my tuition and a monthly stipend.

SHORT VERSION:

For years 2006, 2007 I claimed full refund of taxes based on US-Russia Treaty Article 18 (http://www.irs.gov/pub/irs-trty/russia.pdf) and got the refund no problem.
Now I did more research and 70% sure that I should actually pay taxes from my GSR stipend.

QUESTIONS:

1. Am I actually exempt from federal tax based on US-Russia treaty article 18?
2. If not, what are my options now? Should I file an amendment? Would I have to pay interest, penalties or even face criminal charges?


DETAILED VERSION (IMPORTANT INFORMATION HERE):

I paid taxes from my fellowship in 2006. Later In 2007 I became aware of the tax treaty between US and Russia in particular Article 18 (http://www.irs.gov/pub/irs-trty/russia.pdf). I called IRS to clarify it. I took them about 20-30 minutes to figure out the answer. The person on the line (I have their ID number) read the article, asked me questions what is exactly GSR, where does the money come from, whether my school gets the money from some governmental agency grant, which one, whether research is done in the public interest and how long have I been in US. After that they said that I'm exempt from paying tax on my GSR stipend for up to 5 years.
Then I asked them about my previous payment of taxes on the fellowship and they said I should just file an amendment to the tax return.

So I filed the amendment for 2005 and the tax return for 2006 claiming the full refund. I got the refund for 2006 and about 2 months later I also got the refund for the amended return 2005.

I filed the same way for year 2007 and again quickly got my tax back.

Now our school got this system called GLACIER which tells me that I do not have an exemption from tax on my GSR stipend. I started researching this topic again... Now I see that more and more resources (mostly different universities web sites) say that while fellowships are excluded for taxation for the Russian residents, the GSR stipend is not.

I called IRS again, explained the situation, but they said that Article 18 should work for me. However, they didn't pay much attention to my case this time. I also e-mailed them but just got copy and paste answers from the treaty article with the conclusion: "... if you meet the above qualifications, your grant, allowance, or other similar payments from a governmental, religious, charitable, scientific, literary, or educational organization will be exempt for a period of no more than 5 years to do research for the public benefit."

Now I do not know what to do. This treaty article is kind of vague and I'm getting a feeling that I actually should pay taxes from GSR stipend and these guys at the IRS help line are not very competent.

I read the Russian version of the treaty and the wording there is a little more clarifying and slightly differs saying: "... as a recipient of STIPEND, allowance and other similar payments...".

1. What is the worse case scenario in this situation?

2. What should I do:
2.1. Keep returning taxes as I did
2.2. Stop returning taxes, but leave previous years unchanged
2.3. Stop returning taxes and amend previous years
2.4. Something else?


Thanks for taking your time to think about this!

[MukatA]

I will answer only about 2008:
File nonresidnet tax return. Your income is not subject to SS tax and Medicare tax. The treaty article 18 has exemption for Scholarhips and Fellowship grants.
GSR stipend is taxable.
Read IRS Publication 901: Tax Treaties. Page 45 has a summary.

[Rutax]

MukatA,

I appreciate your advice. If I amend my previous years returns what can be the consequences?

[MukatA]

You must pay tax due with interest and penalty. For penalty you can request a waiver explaining why this happened.
Interest is 6% per year up to 2008 and 5% in 2009. Penalty is about 1/2 per cent per month.

[Rutax]

Thanks again, MukatA. Are there any legal consequences like criminal charges or possible problems later getting new visas, if I amend?
What is the chance to be audited?

[MukatA]

About legal and criminal charges: I am not aware if IRS has ever done in such cases.

Also if you amend on your own, without getting any letter from IRS, you may even get waiver for penalty. However, you must pay interest on the tax due.

You can get professional help from AtlantaTaxExpert.

[Andrey777]

I disagree. Here is the word in word Article 18 of US-Russia treaty:
ARTICLE 18
Students, Trainees and Researchers
1. An individual who is a resident of a Contracting State at the beginning of his visit to the other
Contracting State and who is temporarily present in that other State for the primary purpose of:
a) studying at a university or other accredited educational institution in that other State,
Or
b) securing training required to qualify him to practice a profession or professional
Specialty, or
c) studying or doing research as a recipient of a grant, allowance, or other similar
Payments from a governmental, religious, charitable, scientific, literary, or educational
Organization,
Shall be exempt from tax by that other State with respect to payments from abroad for the purpose of
His maintenance, education, study, research, or training, and with respect to the grant, allowance, or
Other similar payments.
2. The exemption in paragraph 1 shall apply only for such period as is ordinarily necessary
To complete the study, training or research, except that no exemption for training or research shall
Extend for a period exceeding five years.

For example, I receive research assistantship from Indiana University. Part 1,c) of article 18 clearly states that such payments are exempt from taxation. Publication 901 that MukatA mentions simply cites Article 18 and while mentioning fellowships and scholarships implicitly includes assistantships in this category, if part 2 is satisfied.

[AtlantaTaxExpert]

I tend to agree with Andrey, in that Article 18 broadly allows for the grants and stipend to be tax-exempt.

However, if the university viewed the GSR stipend to be compensation for work performed, then it would be considered, under normal U.S. tax law, to be taxable income, at least in the case of graduate student researcher who is a U.S. citizen.

That said, tax treaties routinely supercede tax law when the two conflict.

In my opinion, Rutax should continue to file as he has filed, claiming the complete tax exemption through 2009 (the exemption ended on 31 December 2009). He acted in good faith based on guidance from the IRS and on his interpretation of Article 18 of the tax treaty.

Further, when he submitted the 2005 amended return requesting a complete refund based on Article 18 of the U.S.-Russian Tax Treaty, I guarantee that an IRS tax representative with expertise in international tax matters both thoroughly reviewed the amended return and researched the tax treaty in question before approving the refund as requested.

In short, this issue has already been thoroughly researched by the IRS, and they have already decided that Rutax's GSR stipend IS tax-exempt.

I believe this is clearly a case of "let the sleeping dog lie".