Retroactive Taxation for German Citizen

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

 

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)?

 

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

 

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.

 

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

 

I don't know the penalty and interest rates off the top of my head - they
should be available from the IRS website.

 

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!