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rivel · Jul 23, 2010, 08:12 AM

Hi, I am a J1 research scholar from India. As per India-USA tax treaty, I took tax exemption to my slary for initial two years. As per I knowledge, according to treaty rule, I can take tax exemptionfor initial two years and after 2 years, I need to go back to India. But, now I want to stay for another 2 - 3 years and now, in my 3 rd year, I started paying taxes after first 2 years. What are the penalities or consequences, if I stay another 2-3 years? At any time the tax authorities may ask me to pay back all my tax. What are the exact rules of it. Is it will become a problem if I apply for a green card or H1 visa status?

AtlantaTaxExpert · Jul 23, 2010, 08:59 AM

There is a retroactive tax clause that requires you pay the taxes for the first two years if you stay beyond the original two-year J-1 tour. It is contained in the technical explanation of te U.S.-India Tax Treaty; extract below.

If a professor or teacher remains in the host State for more than the specified two-year
period, he may be subject to tax in that State, under its law, for the entire period of his presence.

It COULD be an issue when you apply for the green card, as the USCIS asks the IRS to review the tax returns for all green card candidates.

rivel · Jul 23, 2010, 12:26 PM

Thank you for your answer. Please inform me about retroactive tax payback. I have one more doubt. How the IRS identifies the J1 scholars who took tax exemption for initial 2 years and also stays in USA after 2 years? I heard that there are some scholars who are still staying without paying back the initial 2 year taxes. The tax exemption issue won't come out until they apply for green card or visa status change it seems. What are the other consequences, if they won't pay back the taxes. Is there any penalisation or imprisonment? These are my doubts only. Please clarify.

Originally Posted by AtlantaTaxExpert

There is a retroactive tax clause that requires you pay the taxes for the first two years if you stay beyond the original two-year J-1 tour. It is contained in the technical explanation of te U.S.-India Tax Treaty; extract below.

If a professor or teacher remains in the host State for more than the specified two-year
period, he may be subject to tax in that State, under its law, for the entire period of his presence.

It COULD be an issue when you apply for the green card, as the USCIS asks the IRS to review the tax returns for all green card candidates.

AtlantaTaxExpert · Jul 23, 2010, 01:23 PM

There is no imprisonment on something this minor.

Further, the IRS DOES have to identify your tax return as being exempt for the two years, then paying in successive years on the same visa. A J-1 professor can legally return to India for a year and return on another visa (J-1, L-1, H01, H-1B) and owe no tax on the first J-1 tour.

However, once the IRS does identify your return as being liable for the retroactive tax, they WILL pursue you for the back taxes, even if you return to India. The will enlist the aid of the Indian government to collect the taxes (there is a reciprocity agreement in the tax treaty).

With penalties and interest, the eventual payment could be over TWICE what the original tax was.