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J1 tax nightmare - grateful for any advice

J1 tax nightmare - grateful for any advice

Old Feb 21st 2008, 2:39 am
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Default J1 tax nightmare - grateful for any advice

I am a British citizen who started work as a postdoctoral researcher in February 2005.

The USA-UK tax treaty stipulates that I am tax exempt for 2 years but after this period "may" have to pay those taxes retroactively.

I decided not to pay tax for those 2 years as I originally only planned on staying for <2 years and also because the amount that postdocs get paid is barely a living wage and the cost of living in this area is very high. My boss told me not to worry about the retroactive nature of this tax agreement, because the IRS "don't really know what postdocs are" and that it would be very unlikely I would have to pay those 2 years of backtaxes. For the past 12 months (my 3rd year) payroll have deducted taxes from my salary, and it is now time for me to file my taxes for the first time.

Everyone I have spoken to thinks I am going to be hit with these backtaxes and I am now terrified of this possibility as my finances are already in a *very* fragile condition. So I have the following questions:

1. Is it possible for me to get H&R block premium (or whoever) to file taxes for me for the past 12 months only? Or will H&R block or the IRS call me on the fact that I have been in the country for 3 years? Perhaps they will check the dates and details of my visa? I don't want to commit tax fraud, but I don't want to draw attention to those 2 previous years unless I absolutely have to.

2. If the IRS call me on those 2 years of taxes, how soon will I need to repay them and will I have to pay them 100% of what I owe? I have read of something called an offer-in compromise and also that they take into account financial hardship when agreeing to the repayment terms. Having to repay 25-30k in taxes would be devastating and right now almost impossible.

I know I really have only myself to blame here - for accepting bad advice and for not researching this issue adequately. I am beside myself with worry, so if anyone can offer me any advice I will be very grateful. Thanks.
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Old Feb 21st 2008, 3:30 am
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Default Re: J1 tax nightmare - grateful for any advice

Originally Posted by axon 1
I am a British citizen who started work as a postdoctoral researcher in February 2005.

The USA-UK tax treaty stipulates that I am tax exempt for 2 years but after this period "may" have to pay those taxes retroactively.

I decided not to pay tax for those 2 years as I originally only planned on staying for <2 years and also because the amount that postdocs get paid is barely a living wage and the cost of living in this area is very high. My boss told me not to worry about the retroactive nature of this tax agreement, because the IRS "don't really know what postdocs are" and that it would be very unlikely I would have to pay those 2 years of backtaxes. For the past 12 months (my 3rd year) payroll have deducted taxes from my salary, and it is now time for me to file my taxes for the first time.

Everyone I have spoken to thinks I am going to be hit with these backtaxes and I am now terrified of this possibility as my finances are already in a *very* fragile condition. So I have the following questions:

1. Is it possible for me to get H&R block premium (or whoever) to file taxes for me for the past 12 months only? Or will H&R block or the IRS call me on the fact that I have been in the country for 3 years? Perhaps they will check the dates and details of my visa? I don't want to commit tax fraud, but I don't want to draw attention to those 2 previous years unless I absolutely have to.

2. If the IRS call me on those 2 years of taxes, how soon will I need to repay them and will I have to pay them 100% of what I owe? I have read of something called an offer-in compromise and also that they take into account financial hardship when agreeing to the repayment terms. Having to repay 25-30k in taxes would be devastating and right now almost impossible.

I know I really have only myself to blame here - for accepting bad advice and for not researching this issue adequately. I am beside myself with worry, so if anyone can offer me any advice I will be very grateful. Thanks.
Tax evasion is a serious crime here..don't even think about ..
better to make a deal .......
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Old Feb 21st 2008, 11:19 pm
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Default Re: J1 tax nightmare - grateful for any advice

What Ray said. Even if it takes them a couple of years to find out, they'll still come after you.
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Old Feb 22nd 2008, 3:22 pm
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Default Re: J1 tax nightmare - grateful for any advice

Originally Posted by axon 1
2. If the IRS call me on those 2 years of taxes, how soon will I need to repay them and will I have to pay them 100% of what I owe? I have read of something called an offer-in compromise and also that they take into account financial hardship when agreeing to the repayment terms. Having to repay 25-30k in taxes would be devastating and right now almost impossible.
If your federal tax would be 25-30K for 2 years, then you were making fairly good money and should not have been living on the edge financially.

Makes no difference and is just an observation. Hire a tax accountant who is familiar with international tax law and have them do your tax return(s). H&R Block does not deal with this.
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Old Feb 22nd 2008, 3:48 pm
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Default Re: J1 tax nightmare - grateful for any advice

If you're estimating the tax you owe by looking at how much is now being deducted from your pay, it might not be as bad as you think. A lot of people end up having too much tax withheld and get refunds each year. If you want to see what your tax will be, a lot of online services only charge you when you actually file.
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Old Feb 22nd 2008, 5:02 pm
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Default Re: J1 tax nightmare - grateful for any advice

I do not advise that you try to avoid paying the back taxes. The wording in IRS Publication 901 is not that you "may" have to pay the taxes. Directly from Pub. 901:

"A professor or teacher who is a resident of the United Kingdom on the date of arrival in the United States and who is in the United States for not longer than 2 years primarily to teach or engage in research at a university, college, or other recognized educational institution is exempt from U.S. income tax on income for the teaching or research. If the individual’s 2-year period is exceeded, the exemption is lost for the entire visit, including the 2-year period."

If I were you I would call the IRS with a general question on your situation and how one would go about figuring the taxes owed.

My advice to people on J1s who don't want to pay the tax - go back to the UK for a while and get a new visa. That way, your J1 visit, where you were exempt from taxes, ended before the two years was up so you have complied with the treaty terms. Life would be easier if you reentered the country in a different tax year from when your previous visit ended.
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Old Feb 29th 2008, 1:11 pm
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Default Re: J1 tax nightmare - grateful for any advice

Originally Posted by Ray
Tax evasion is a serious crime here..don't even think about ..
better to make a deal .......
hi guys, can you please help me with a question i have?
I am a British citizen living in England and I recently got the opportunity to do some consultancy work (some software progamming work) for a US company. They sent me the contract to sign along with 2 tax forms. The forms require the details of the treaty and article under which I am allowed to be exempt from paying taxes is the US. Does any of you know what the related tax treaty and articles are? I will work for the US company as an individual from England and I do not have my own company. So I guess there must be an article related to the roaylties I will be receiving.

I look forward to hearing from you

regards
Panos
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Old Feb 29th 2008, 1:24 pm
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Default Re: J1 tax nightmare - grateful for any advice

Originally Posted by panayiotis34
hi guys, can you please help me with a question i have?
I am a British citizen living in England and I recently got the opportunity to do some consultancy work (some software progamming work) for a US company. They sent me the contract to sign along with 2 tax forms. The forms require the details of the treaty and article under which I am allowed to be exempt from paying taxes is the US. Does any of you know what the related tax treaty and articles are? I will work for the US company as an individual from England and I do not have my own company. So I guess there must be an article related to the roaylties I will be receiving.

I look forward to hearing from you

regards
Panos
I don't really see why you have to get involved in US taxes at all ...
its up to them to pay you ...and for you to pay UK taxes
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Old Feb 29th 2008, 1:40 pm
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Default Re: J1 tax nightmare - grateful for any advice

Originally Posted by Ray
I don't really see why you have to get involved in US taxes at all ...
its up to them to pay you ...and for you to pay UK taxes
I suspect the company wants to know if they have to withhold or not.
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Old Feb 29th 2008, 2:14 pm
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Default Re: J1 tax nightmare - grateful for any advice

Originally Posted by panayiotis34
hi guys, can you please help me with a question i have?
I am a British citizen living in England and I recently got the opportunity to do some consultancy work (some software progamming work) for a US company. They sent me the contract to sign along with 2 tax forms. The forms require the details of the treaty and article under which I am allowed to be exempt from paying taxes is the US. Does any of you know what the related tax treaty and articles are? I will work for the US company as an individual from England and I do not have my own company. So I guess there must be an article related to the roaylties I will be receiving.

I look forward to hearing from you

regards
Panos
Article 14 of the UK/USA Double Taxation Convention: "salaries, wages, and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State."

i.e. If you live in the UK, and are employed by a US company, you will be taxed only in the UK, unless you are physically present in the US as part of your employment.

http://www.hmrc.gov.uk/international...nsolidated.pdf
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Old Feb 29th 2008, 2:45 pm
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Default Re: J1 tax nightmare - grateful for any advice

Originally Posted by axon 1
I am a British citizen who started work as a postdoctoral researcher in February 2005.

The USA-UK tax treaty stipulates that I am tax exempt for 2 years but after this period "may" have to pay those taxes retroactively.

I decided not to pay tax for those 2 years ....

I know I really have only myself to blame here - for accepting bad advice and for not researching this issue adequately. I am beside myself with worry, so if anyone can offer me any advice I will be very grateful. Thanks.
I came over as a post-doc in Feb 2004 on a J1. I had no idea how long I was going to be in the country so erred on the side of caution and paid the tax. It sucked HARD because J1's have to file 1040NR, which doesn't give you the standard deductions. But, you don't have to pay medicare or social security, so it even's itself out. I'm on H1-B and filing 1040EZ, so none of this matters to me now... but I have 2 post-doc colleagues in your exact position now.

Anyway, some useful points:

1) On $40K pa, you should be looking at paying around $10k a year in taxes. How you can be hard up when expecting to owe ~$25K is beyond me. Unless you are living on Sunset Blvd. and eating out every day, or something.
2) The IRS are not to be taken lightly. They are not the Student Loan Company, they have the power to take all your property and put you in jail.
3) Your supervisor sucks. While your uni may not know what a post-doc is (most US colleges don't) the IRS don't actually care what you are. He/she should have told you to put the estimated taxes into a high interest rate account so that if you did stay over 2 years you had the money (and more) to give to the IRS. That is what our post-docs do now.
4) I have also heard that you will be able to make a deal with the IRS. The conversation goes:
IRS: GIVE US ALL YOUR MONEY!
You: Okay then, I'll leave, taking my taxes and mad skillz with me.
IRS: Oh no, please stay, we want your money!
You: I can't afford it.
IRS: What can you afford?
You: A small amount.
IRS: How about $2K and we don't put you in jail?
You: I love you.
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Old Jun 26th 2008, 4:07 am
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Default Re: J1 tax nightmare - grateful for any advice

Hi guys,

I'm new around here. I'm from the north of Scotland, but I live in Seattle and have been a postdoc here for 14 months. I obviously therefore have about 10 months to go on my J1 before I have to panic.

I earn just under $40k a year. I reckon, based on what my payslips say, that I would owe about $10k to the taxman for the 2 years I will have been here.

If I have to pay retrospectively, should I decide to stay, does anyone have a rough idea of how much the additional fines and interest would be?

Basically I think a hit of much more than $10k would be unsustainable on a post-doc salary, so I am thinking I will need to either switch into an industrial job or move back to Europe, in which case it is time to start sending out feelers to potential employers. Unfortunately I really like Seattle and would like to stay here.
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Old Jun 26th 2008, 5:46 am
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Default Re: J1 tax nightmare - grateful for any advice

OK, here is some practical advice.

It sounds as if you haven't even filed your tax return for 2007 yet.
That return is now late and you should get it prepared and filed as soon as possible.

Whether you prepare that return yourself or use someone like H&R Block is up to you, They are just tax preparers - they prepare the return based on the information that you give them and they will be perfectly happy to just do the 2007 return for you.

You also need to get professional advice from an experienced tax accountant regarding your tax liability for the prior two years - don't just go for the first one you find in the phone book - you want to find one that has experience with this particular type of issue, so call them and ask them about their experience in this area. (and FWIW I definitely wouldn't use H&R Block for this)

You need to get an accurate estimate of how much tax that you owe for the previous years and then get appropriate returns filed. I suspect that the amount that you owe may be less than you think, but that is one of the things that a good accountant will be able to figure out for you. An accountant should also be able to help minimize the penalties that you will have to pay.

Finally, if you can't pay the entire amount due it should be possible to set up a payment plan with the IRS.
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Old Jun 26th 2008, 6:20 am
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Default Re: J1 tax nightmare - grateful for any advice

I work for a gigantic university. I am under the impression they take care of all my tax paperwork for me. Nobody has ever told me I need to deal with the IRS directly, such as filling out tax returns, as long as I get the hell out of the country before my 2 years on the J1 is up.

However the department that handles all this did not seem to be sure of an algorithm to calculate what I might owe in 2009 if I stay on. That's what I'm trying to figure out here.

I know exactly how much federal tax I am avoiding paying due to the UK treaty - it is printed on my paycheck. What I am not sure is the level of fines and interest the IRS imposes for retroactive taxes. Just a ballpark figure would do.

Where would I go to find out this information?
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Old Jun 26th 2008, 7:31 am
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Default Re: J1 tax nightmare - grateful for any advice

Originally Posted by caleyjag
I work for a gigantic university. I am under the impression they take care of all my tax paperwork for me. Nobody has ever told me I need to deal with the IRS directly, such as filling out tax returns, as long as I get the hell out of the country before my 2 years on the J1 is up.
Tax returns are the responsibility of the individual. I highly doubt that your university is doing this for you unless you are paying them to do so. In J-1 status, you are required to file at least forms 1040NR / 1040NREZ and 8843 regardless of income. Maybe others too, don't know.
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