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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7719
Experience:  15years with H & R Block. Divisional leader, Instructor
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Ive got an examination from IRS. I am a citizen of Russia.

Resolved Question:

I've got an examination from IRS. I am a citizen of Russia. I was on J1 visa the full year (2010). I declared myself as a 'non-resident' and took tax treaty exemption for the whole year. I had salary from US government grants, working as a researcher,
the whole year. However, a part of year I was paid by one sub-contractor, who gave me tax treaty automatically, and the second part of the year I moved to the another
sub-contractor, who paid me 'salary' with W2 form. The source of money was the same, ie US government grants. US-Russia tax treaty directly says I may be eligible for tax treaty, if I am doing research and money are from grants.

However, IRS interpretation seems different. They want me to return taxes from the second sub-contractor (W2 form) saying 'the source of money was reported as US income'.
So,
(1) Do I have good chances for appeal even if my money were reported at W2
in this case?
(2) If no, May I change my status to "resident for tax purposes" for year 2010,
AND take tax treaty for a part of the year? After reading of Internet,
I've found it may be possible for the most of tax treaties.


Thank you very much,
Natalia
Submitted: 1 year ago.
Category: Tax
Expert:  Robin D. replied 1 year ago.

Robin D. :

Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.
Your income from the employment was taxable in the year you earned it. It was taxable to the US because you were an employee in the US when you were doing the work.
You would not be allowed to appeal and have the W2 income seen any other way unfortunately.
As far as claiming non resident and resident, you were here on J1 VISA which means you cannot count any of the days for the 5 years you were first in the US. You would still be a nonresident for 2010 but the income as an employee would be taxable.
The tax treaty would be used for your grant income but it is the income as an employee with the contractors that placed you in a bad way for US tax purposes.
If you have not done so yet I would advise that you have a local tax professional (CPA or Enrolled Agent) to assist you with this matter. They will need to prepare the correct 1040NR for you for 2010 claiming the correct amounts for treaty benefit and show the correct income. You most likely had withholding on that W2 so you would recieve credit for that amount against the income tax.

Robin D. :

My goal is to give you excellent service. If you are satisfied, please rate me. If you have follow-up questions on this same topic, use the reply box below. To start a new conversation with me on a new topic request me again.

Customer:

" ... As far as claiming non resident and resident, you were here on J1 VISA which means you cannot count any of the days for the 5 years you were first in the US. ... " - This information disagrees with my previous experience. The presence test does not say anything specific about J1 visa. Please clarify if possible on it.

Robin D. :

Sorry about that 5 years only mention, Generally, J-1 professors and researchers become residents and subject to these taxes after 2 years. Students generally become residents for tax purposes after 5 years.
As you were on J1 you would be under the 2 year rule for nonresident.

Robin D. :

This means that during the 2 years you would not count days in the US but employement in the US is taxable as US sourced income.

Customer:

Would you please give me a reference on any documents saying I should not count days when I on J1 visa?

Robin D. :

http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Student-Liability-for-Social-Security-and-Medicare-Taxes

Scan down to near the middle:
"In a similar fashion, foreign scholars, teachers, researchers, trainees, physicians, au pairs, summer camp workers, and other non-students in J-1, Q-1 or Q-2 nonimmigrant status who have been in the United States less than two calendar years are still NONRESIDENT ALIENS"

Robin D. :

That page is on the IRS.gov site and easier to read then most others.

Robin D. :

If you wanted to verify the US tax law that would be I.R.C. § 7701

Robin D. :

Yes there are exemptions from income per the Russia/US treaty but under the treaty articles the exemption does not apply if the employee's compensation is borne by a permanent establishment (or in some cases a fixed base) that the employer has in the United States.

Robin D. :

The contractor employment would not be allowed for exemption. The IRS publication 515 has Tables in the back that show the amounts liable for exclusion.

Customer:

(1) But, if I arrived to US in 2007, and want to change status to resident alien in 2010, it seems I can do it?

Robin D. :

If you were in the US longer than the 2 year period on the J1 then you yes you should have changed to resident alien.

Customer:

So, again, may I request status change from non-resident to resident, being on J1 visa,

Customer:

AND taxe tax treaty at the same time?

Robin D. :

You would be a resident alien for the entire year, you would not be allowed to claim the half year (Dual Resident the IRS refers to it).

Robin D. :

Resident aliens are taxed just like citizens , on worldwide income.

Robin D. :

No tax treaty benefit would be allowed.

Customer:

http://www.vanderbilt.edu/visit/international-tax/tax_treaty_savings_clause.php

Customer:

Sorry, I wanted to explain first.

Customer:

Your answer seems obvious. However, I searched through internet trying to find answer and seems

Customer:

there is a solution, at least at the page I've sent you. May I have your comment on this information?

Customer:

Basically a key word is "exception to saving clause" I've found similar on IRS web-site: http://www.irs.gov/Individuals/International-Taxpayers/Resident-Alien-Claiming-a-Treaty-Exemption-for-a-Scholarship-or-Fellowship

Robin D. :

I know about the saving clauses in treaties (and that article is very well written). There is no saving clause between Russia and the US that would allow for you to not be taxed in the US on US sourced income especially if you were in the US while earning that income.

Robin D. :

The income in question that the US wants to tax you on appears to be the employment based on your original post. Are they attempting to make you pay tax on all income?

Customer:

On a part of income A part of year my salary was reported on 1042-S and this part is tax exempt and IRS agrees The second part when I moved to the second subcontractor was technically employment and was reported on W2 But what puzzles me it was the same money - actually my own research grant

Robin D. :

The employer that issued the W2 would have to correct all that and issue you a corrected W2 if the employment was not really as an employee.

Customer:

What does it mean? What they may try to correct?

Robin D. :

If the employer that issued you the W2 corrected the situation by issuing a corrected W2 and showing that they did not pay you then the IRS would not question but if you were employed by the company it is taxable.

Robin D. :

You would have to speak with that employer and see why you were paid as an employee if it was really your grant money for research.

Robin D. :

I am going to have to step out for a sec

Customer:

I probably will try but it's a big university, and seems they will not change their rules just for me. However it's very common situation - researchers on J1 like me are normally on government money. For example, my friends working with me had another university as a subcontractor, and this university allowed treaty exemption directly from W2. My university does not do that.

Customer:

After chatting with you, I decided I will try to appeal.

Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7719
Experience: 15years with H & R Block. Divisional leader, Instructor
Robin D. and 7 other Tax Specialists are ready to help you
Expert:  Robin D. replied 1 year ago.
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Robin D.
Robin D.
Tax Professional
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15years with H & R Block. Divisional leader, Instructor