Retroactive Taxation for German Citizen

Discussion in 'US Taxes' started by Sascha, Feb 15, 2005.

  1. Sascha

    Sascha Guest

    Hello,

    I am a graduate student and German citizen in the US (employed as a
    research assistant) and I am here since August of 2001. For 2002 and
    2003 I claimed a tax exemption on my income of $6,000 and $5,000,
    respectively. While filing my taxes for 2004 now, I saw that this tax
    exemption (20(4)) has a retroactive clause, stating that if I should
    reside in the U.S. longer than 4 years, I will be liable for tax for all
    years claiming treaty exemptions.

    As far as I understand that means I would have to pay back all the taxes
    I saved with the exemption, plus penalties. I was not aware of this
    retroactive clause when I filed my taxes. And I will definitely still be
    in the US during 2005 and 2006, meaning that this retroactive clause
    will apply to me. Can anybody give me some advice on what I need to do?

    Thanks,
    -- Sascha
     
    Sascha, Feb 15, 2005
    #1
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  2. Sascha

    Shyster1040 Guest

    What specific exemption are you talking about? In the Internal Revenue
    Code, or in the US-German treaty (and which treaty, income tax or social
    security)?
     
    Shyster1040, Feb 15, 2005
    #2
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  3. Sascha

    Sascha Guest

    Hello,

    I am talking about income tax and

    CONVENTION
    BETWEEN
    THE UNITED STATES OF AMERICA
    AND
    THE FEDERAL REPUBLIC OF GERMANY
    FOR THE AVOIDANCE OF DOUBLE TAXATION
    AND THE PREVENTION OF FISCAL EVASION
    WITH RESPECT TO TAXES ON INCOME AND CAPITAL
    AND TO CERTAIN OTHER TAXES

    A link to the treaty can be found here:
    http://www.unclefed.com/ForTaxProfs/Treaties/germany.pdf

    I am talking about Article 20(4). I thought this exemption applies to
    me, but now I saw that people that stay for more than 4 years cannot
    claim this exemption, but I did twice in 2002 and 2003. I don't know now
    what the procedure is... I will definitely exceed the 4 your period now
    as I will be in the US working on my PhD until at least the Summer of
    2006, and I arrived in August of 2001.

    -- Sascha
     
    Sascha, Feb 15, 2005
    #3
  4. Sascha

    Shyster1040 Guest

    I regret that I cannot find much on this. There is a withholding form put
    out by the University of Chicago, accessible at:
    http://adminet.uchicago.edu/emps/foreign/878_Germany.pdf, which describes
    a little bit what should happen.

    That form (which obviously is not any sort of a statement by the
    government) states that it is your responsibility to amend your prior
    years' tax returns to reflect the loss of the exemption. That being said,
    I don't know what the audit rate is for the returns of students who lose
    their treaty exemption retroactively; presumably you are still under the
    general statute of limitation rules (generally 3 years from the due date
    for filing the return in question).

    The exception, of course, is that the "competent authorities" of the US
    and Germany may determine that you do not need to pay the past taxes that
    should have been withheld. I cannot find anything on such proceedings
    with respect to this question, although I would surmise that they will not
    permit you to avoid the retroactive effect unless you can show that there
    was some sort of substantial problem that caused you to overstay the four
    years, and you might be required to agree to be finished in another year
    in order to avoid retroactivity.

    As a first start, you should check with the University you're at, to see
    whether this situation has occurred before and what advice they have. You
    should also contact the German Embassy and/or a local German consulate to
    see if they can give you some advice on the problem.

    Beyond that, since you know you will lose the exemption, you should not
    claim it for 2004 or going forward, to avoid any more unpaid taxes, and
    then consider whether you can afford to pay the back taxes by means of
    filing amended returns for 2002 and 2003 - that way you can stop interest
    running and decide if you want to seek a refund based on competent
    authority proceedings.
     
    Shyster1040, Feb 16, 2005
    #4
  5. Sascha

    Sascha Guest

    Ok,

    Thanks your advice. I will contact my univeristy and the embassy and see
    what they say. Do you have an idea what the typical penalty and interest
    rate is?

    Thanks,
    -- Sascha
     
    Sascha, Feb 16, 2005
    #5
  6. Sascha

    Shyster1040 Guest

    I don't know the penalty and interest rates off the top of my head - they
    should be available from the IRS website.
     
    Shyster1040, Feb 16, 2005
    #6
  7. Sascha

    ButterflyS

    Joined:
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    How did you resolve the situation? I really hope this messages reaches you, I am in the exact same situation right now and don't know what to do!
     
    ButterflyS, Apr 5, 2012
    #7
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