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Retroactive loss of USA-Germany Income Tax Treaty benefits

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  • Retroactive loss of USA-Germany Income Tax Treaty benefits

    Hello all; could you be so kind to advise on the following issue, please?

    In 2012-2014, I was a NRA F-1 student, filed for federal and state tax refunds accordingly, and, per advice from the college administration, claimed the US-Germany tax treaty benefits (the $9K exemption). In 2015, I had adjusted my status to a RA H-1B worker and have been filing my taxes as usual, without claiming any tax treaty benefits, ever since.

    Now, I was, and to a degree still am, never 100% sure on how long I would be staying in the States. The treaty, nevertheless, contains a cause stipulating the retroactive loss of tax benefits should the beneficiary stay in the US for more than 4 years -- without actually describing the process. Today is 2018, it has been 6 years, and I am still here...

    What I would like to get a clarification on is: what, how, when, where do I need to file with respect to this and what are the consequences?

    I live in a rural area, the tax prep services, CPAs, and tax attorneys around here do not seem to profess a lot of expertise in dealing with international tax treaties, non-resident aliens, and retroactive clauses. Over the last two years, I had multiple conversations with representatives of the state Department of Revenue and the IRS as well -- they were unable to provide any useful guidance on this either.

    For example, the state says something along the lines of "we follow federal guidelines, please work with IRS on this issue" and the IRS says "our records show that you do not owe any tax at the moment and as for the international treaty matters, this question is something that our representatives are no longer able to answer via phone or in-person, please seek professional help" and professionals, i.e., CPAs, lawyers, etc. who I have reached out to on this typically ask "did you receive any notices from the IRS?" (I did not) and can only offer me preparation of the 1040X forms for 2013-2014 (2012, my first year in the US, does not matter: low income, less than exemption -- so treaty or no treaty, taxes / refund would be $0) but not guidance, which is important, in my opinion, e.g., is 1040X even the right form to file? (no document I have seen mentions it, nor instructions for the 1040X itself list such or similar situations among the reasons to file it) What about the statute of limitations? (see below) Am I going to be subject to any penalties for overstaying the 4 year period mentioned in the tax treaty and still not yet having this retroactive tax payment matter resolved despite my best efforts and proactive communication with authorities? (see below)

    So, is there a law or a guideline that regulates how exactly a tax payer should be apparently paying back to the state and the IRS the amount of taxes exempted under the treaty in previous years? As far as I can see neither Publication 901, nor Instructions for Form 1040X, nor the text of the actual tax treaty provide an adequate, any actually, explanation on this! Or, if anyone could share their personal experience handling something like this, it would be also greatly appreciated indeed!

    To clarify: this inquiry is my personal, proactive discovery -- I have not actually received any notices from any agencies, state or federal; on the contrary, all my tax refunds for all past years were always filed timely, then accepted, and processed successfully. And at this time, I am reluctant to simply file amended returns for the first 3 years (2 actually, see above) because, again, there are no clear instructions in any of the documents I have seen so far that is the right thing to do and what needs to be done in this situation.

    My main concern with respect to doing it this way is that such an action, taken voluntarily, could be misinterpreted as an ordinary retroactive tax payment (which, in my understanding, it is not -- a part of the income was legally exempt from taxation under the treaty at the time, the paperwork was done correctly, and the amounts of tax paid or refunded were also correct at the time) and, therefore, may be subject to (additional) penalties and / or interest and whatnot.

    Please let me know if you have any questions and thank you all very much for all and any of your help with this matter!

    P.S. A separate but related question -- does the statute of limitations apply in this case? How specifically? And how long is it? (e.g., if the federal statute of limitation is only 3 years and the treaty mentions overstaying the 4-year period, could the taxpayer be still legally subject to any collection activities in the fourth year at all if the collecting agency took no action in all previous years?)

  • #2
    Yes, you will be filing Form 1040X for each of those four years. First, you'll prepare a restated 1040NR for those three tax years. You won't file it, but you'll use those figures as well as the figures from the 1040NR's you did actually file to prepare the three 1040X's.

    If you need professional assistance, find an Enrolled Agent

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    • #3
      inadmissible -- Many thanks for your quick response and help!

      My main concern with the consequences of handling this matter this way is possibly having to pay interest and / or penalties "for late taxes" on something that was legally exempt from taxation at the time, which seems unreasonable to me... Are you aware of any other options?

      Yes, I am continuing to search for an accountant or an attorney representation in my local area, thank you!

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      • #4
        yoosernaim Did you find a solution to your problem? and got the answers? I'm in the same boat. Any information from you would be very helpful.

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