Hello! My issue is :- I am in USA (Atlanta) from 29th July 2009 on J1 visa for my post doctarate study. I am receiving approx.32500$ p.a. I was not asked to pay any tax earlier as initially it was for 1 year only. Now my tenure has been extended for another year & they are asking me to pay tax + interest + penalty on my earlier income too. I just want to know whether I am required to pay any tax, if yes then how much & how can I reduce my tax liability & penalty?

The retroactive tax provision for tax-exempt J-1 visaholders kicks in at the TWO YEAR ANNIVERSARY of your arrival.

Based on your posting, you are still in tax-exempt status until 29 July 2011.

Now, if you KNOW for fact that you will stay significantly beyond 29 July 2011, then, yes, you should file/amend your 2009 return and submit a Form 1040NR or 1040NR-EZ plus Form 8843 (if you did not file already this form) to pay the tax. You can ask the IRS to waive any penalties, which they probably will, but the interest CANNOT, bey law, be waived.