US income taxes for an Indian citizen with US-sourced income

Question

I am an Indian citizen who left US after completing my masters in Aug 2010. Since then I have never re-entered the US and I stayed only in India. I was in the US only on a student visa and did not have a green card or anything alike.

However, I have been working as an independent contractor for a US software company since Jun 2010. I generate invoices for them and they make payments in my Bank of America account. From there I transfer it back to India.

I had filed an income tax return and paid required taxes in US for the year 2010 when I did stay in US till Aug. For years 2011 and 2012, I was under the impression that I am required neither to pay taxes nor to file a return in US. But I got a notice from IRS saying that I haven't filed any return for year 2011.

Am I still supposed to file return and pay taxes in US (whatever remains after foreign tax credit for what I pay in India) as my income originates in US?

I have been paying taxes and filing returns regularly in India.

Answer 1

The fact that you got notice doesn't necessarily mean that you should have filed. What it means is that the IRS thought that you should file. They're expecting your tax return, and I suspect it is because you made a mistake.

There are several different mistakes that you could have made (the list below is not complete, just what came to my mind right now):

1. You filed 2010 return as a resident (form 1040) instead of non-resident (1040NR) that you should have. IRS expects you to continue filing as resident, or to notify them of termination of residency. But since you've been on a student (J/F) visa - you were not a resident to begin with.
2. You filed form W9 with your bank or your clients. Form W9 is for residents, so they report your income to the IRS as if you were a resident. Hence the IRS expectation of a tax return. What you should have filed with them was form W8-BEN or W8-ECI, to show your non-resident status.
3. You received interest on your BofA bank account and didn't report it to the IRS, while they did. This is a matching error. Even if you're not supposed to pay tax, you should file tax returns in these cases to avoid these notices. However, if that's the case, you should have also paid some tax (check the treaty).
4. Your client issued a W2 for you. If that happened - it could really mess you up in the US, so I hope its not the case.

I suggest you take it to a US-licensed tax preparer (EA or CPA) who can check what exactly that is that the IRS want from you, why, and how to resolve it.