Further to other recent correspondence on this matter. I have been employed in the US since February 2006 on an H-1B visa. My former employer in the UK asked me to continue assisting on a consultancy basis in the winding up of a few outstanding issues with my work. They paid me $20,000 in four instalments during 2006 as a fee for this. The issues are now all resolved and there will be no further payments

I am now declaring this on my tax filing and I wonder if perhaps I should not have accepted these payments under H-1B status? What action would you recommend?

You should file a dual-status return.

That way, you can legitimately exclude the $20,000 from the Form 1040 portion of the return, as that income is NOT U.S.-sourced and therefore NOT subject to U.S. taxation.

You WILL have to report the income, on the Form 1040NR portion of the return, but it will NOT be taxed, so technically, you have not violated your H-1B visa.