The IRS may reject your tax treaty claim as a Summer Work Travel J-1. What now?
If you worked in the U.S. on a J-1 Summer Work Travel (SWT) program and claimed a tax treaty exemption, you may get a letter from the IRS that changes your return. This post explains why it happens, what we think about the IRS position, and what to do next. Read it before you open the letter, or if you already did.
What a tax treaty claim is
The U.S. has income tax treaties with many countries. Most have an article for students, apprentices and trainees (sometimes called "students and business apprentices"). Under that article, a person from the treaty country who is temporarily in the U.S. may have part of their pay exempt from U.S. income tax, up to a dollar limit or time limit that depends on the country.
This is not the same as the J-1 exemption from Social Security and Medicare tax (FICA). Treaty claims are about federal income tax and are made on Form 1040-NR. Under IRC section 6114 and Treas. Reg. 301.6114-1, a treaty-based position is generally disclosed on Form 8833, the Treaty-Based Return Position Disclosure. Some treaty claims on wages are listed on Form 1040-NR Schedule OI and may not need a separate Form 8833, but we attach one when we want the position to be clear.
What the IRS is doing
Some J-1 Summer Work Travel and Camp Counselor participants have received IRS letters (we have seen Letter 916C) that treat their job as a "seasonal-type job" and say J-1 participants are not eligible for treaty benefits under the Students, Trainees, Teachers and Researchers articles on the income they earn working in the U.S. The IRS then declines to process the treaty claim or removes the exemption from the return.
We disagree with that as a blanket rule, and here is why:
Treaty benefits are decided article by article and on your own facts, not by one rule about a visa category. The IRS's own Publication 901 recognizes the student and trainee articles for many treaty countries.
Most treaties do not say that Summer Work Travel or Camp Counselor participants are excluded. Where the treaty text has no such exclusion, we believe a claim that meets the article's requirements is supportable.
Your facts must fit the article you claim. Depending on the country, that can include residence in the treaty country when you arrived, a home-country employer or contract, the purpose of your stay (for example business experience, training, or study), the length of your stay, and a dollar limit.
What an IRS adjustment looks like
If the IRS disagrees, you usually get a notice (for example a CP2000-type or an examination letter). It will show:
The treaty exemption removed from your wages.
A new tax amount.
Interest (IRC section 6601) and possibly a penalty (such as an accuracy-related penalty under IRC section 6662, or a late payment penalty under IRC section 6651).
A deadline to respond.
Read the response deadline first. Missing it can lose you your appeal rights.
Our recommendation: pay to stop interest and penalties
Carolinas Wise (CW) will not file an appeal for you if the IRS adjusts a treaty claim on an SWT return. Our recommendation is to pay the amount due so interest and penalties stop growing.
Paying does not necessarily end your options. If you pay and later believe the adjustment was wrong, you may still be able to file a claim for a refund within the time limits in IRC section 6511 (generally two years from the date you paid). Keep your payment proof and every IRS letter.
For many people the amount is small. Paying and moving on can cost less than the stress and time of an appeal. But it is your decision.
If you decide to appeal on your own
You are allowed to disagree and ask the IRS to reconsider. Here is a simple way to do it:
Read the notice. Find the response date, the phone number, and the notice number (for example CP2000 or a letter number).
Gather your documents before you call. Download your complete tax return file from Verifyle. It includes the Form 8833 we prepared, your Form 1040-NR, and your Form 8843 if one was filed. Keep your W-2, DS-2019, passport, and I-94 nearby.
Call the number on the notice. Tell the agent you are responding to the notice and that you claimed a tax treaty benefit under the student/trainee article. Give the treaty country and article. Have Form 8833 ready to read from or send.
Ask what the IRS needs in writing and what the new deadline is. Ask for a reference or case number.
Send written proof the way the IRS tells you, and keep proof of when and how you sent it.
CW does not represent you in this appeal. We also cannot promise the IRS will agree.
What you can do now to lower the risk
Check that your country's treaty has an article that fits your situation. Not all do, and amounts and limits differ.
Keep your records: DS-2019, pay stubs, W-2, and arrival and departure dates.
File your return on time and attach the right forms.
Respond quickly to any IRS letter.
Bottom line
A treaty claim on an SWT return is a legal position that we believe is supportable when the treaty does not exclude Summer Work Travel. The IRS may still adjust it. If that happens, we recommend paying to avoid more penalty and interest. If you want to fight it, you can call the IRS yourself with your Form 8833 from Verifyle in hand.
This post is general information, not legal advice for your situation. Tax law changes, so check the current rules or ask a tax professional.
Comments