I am an Indian postdoc in US with J1 visa. Before I moved here, I was a Belgian resident. As both Belgium and India has double taxation treaty, I got my federal tax refund for 2 years. Recently I completed my 2 years and planning to stay beyond.
How to proceed with the retroactive taxation?======>> J-1 visa holders are considered non-resident aliens and are required to pay federal, state and local income taxes. However, they are generally exempt from paying FUTA and FICA taxes. Likewise, you are not able to enjoy social security benefits and are not required to pay into the system.however, J-1 visa holders also ?may? have to have unemployment taxes withheld depending on state law. In California for example, trainees/interns must have unemployment withheld even though they cannot ever collect (since they are here training ? not working). ALWAYS check with your tax accountant regarding which taxes should be withheld.As you are a J1 visa holder, You would be a non-resident alien for the first 2 calendar years. Then, you are not subject to FICA (social security/medicare) for payments you received for work related to your visa. If you have a spouse on J2, the spouse would not be exempt.
As a Indian/Belgian citizen, you can use the Indian/Belgian tax treaty which would exempt you from federal income taxes for the first 2 years. However, if you stay longer on the J1 visa, you would have to pay those back retroactively, so in gnenral aslongas you know you will be staying longer, you don?t need to use the treaty exemption (as you would have to pay interest if you pay them back after 2 years). This does not affect your exemption from FICA, you wont have to pay those for the first 2 years.
If you would go back to india after 2 years and come back on a different visa, you would not have to pay the taxes back.
Am I eligible for any kind of tax benefit from IRS if I initiate the payment from my side?==>As mentioned previously. The legal and correct thing that you need to do is to amend your return and pay the taxes. The longer you wait, the more you wil pay in penalties and interest.That said, if there is no audit trail (Form 1099 or W-2) for the IRS to follow, the less likely it is that they will ever catch up with you.Ultimately, it is your decision.