Hi
I am a Researcher at an University, holding a J1 visa and was using the tax treaty exemption for the 2007 tax return for my whole salary. Unfortunately my new job back in Germany fell through so I will stay longer than the two years I always have planned to stay. I know I need to file an amendment and I have to pay back the taxes.
But that leaves me with some questions:

1. What is the right procedure for doing this. Call the IRS and tell them my situation?
2. how can I avoid penalties or interests
3. Can I itemize interests on loans in Germany?
4. I won't be able to pay back all the taxes at once. Is it possible to suggest a payment plan or do I risk to get all my accounts blocked

Thank you for your help

1) No, just file the tax return, which would probably be Form 1040NR. If you already filed a tax return claiming ZERO income, then amend the return using Form 1040X and a new Form 1040NR.

2) You can ask that the penalties be waived, and the IRS usually cooperates. The interest, by law, cannot be waived.

3) Only if the interest is investor's interest or mortgage interest on real estate. Claiming the mortgage interest also has some complications in that the IRS may require you to withhold some of the payment to send to them to make the bank pay U.S. taxes.

4) Yes, you can set up a payment plan and pay it off like a car loan. The IRS charges a very reasonable interest rate (about 8%) and will charge a one-time set-up fee of about $75.