I am currently on a J1 visa. When this ends after 2 years, I want to continue working in the US, but on a different visa. I know if I continue on a J1 visa, I have to pay retrospective taxes, but:

1) If I return on a H1 visa, will I have to pay back the previous 2 years worth of taxes from my time on a J1 visa?
2) How long after leaving the US once my J1 visa is expired can I come back on a H1 visa?
3) If I do have to pay retrospective tax, do the IRS require immediate payment, or do they work on a gradual repayment plan.

Thanks for the help; I've just spent over an hour on the phone with the IRS and they were useless...

Since your topic cites the U.S.-U.K. Tax Treaty, I assume you are from the United Kingdom, and that you believe that, while under your current J-1 visa, you are exempt from all taxes in the United States.

You are mistaken in that belief!

There is NO provision for the teacher/researcher/scholar tax exemption in the latest U.S.-U.K. Tax Treaty. All other J-1 visas MUST pay income taxes on income earned while living and working in the United States.

You ARE exempt from FICA (Social Security and Medicare) taxes for two calendar years as a matter of U.S. tax law.

Actually... I am exempt from income tax. If you look at Publication 901 on the IRS website you will see that it says:
'A professor or teacher who is a resident of the United Kingdom on the date of arrival in the United States and who is in the United States for not longer than 2 years primarily to teach or engage in research at a university, college, or other recognized educational institution is exempt from U.S. income tax on income for the teaching or research. If the individual's 2-year period is exceeded, the exemption is lost for the entire visit, including the 2-year period'
My question is about returning on a H1 visa and my tax liability if I do so.

I will have to stand corrected: the provision that covers the teacher tax exemption is in the 2001 PROTOCOLS, not the treaty itself.

So, to answer your questions...

1 & 2) If you return to the U.K. before getting the H-1 visa, the two-year period will be considered in isolation and you will NOT have to pay any back taxes. As far as I can tell, there is no minimum time required to stay in the U.K. to avoid the retroactive tax provision.

3) If you determine that paying the back taxes IS in fact required, you can set up a payment plan with the IRS by submitting Form 9465.