But if you warn them, won't they just hide the evidence better? I had a former friend who was doing something similar and when someone in our group warned him, he just got more sophisticated about hiding it. Sometimes people need to learn consequences the hard way.

That's a fair concern. If someone is determined to commit fraud, a warning might just make them better at concealing it. However, sometimes people genuinely don't realize the severity of what they're doing - they might see it as "bending the rules" rather than committing a federal offense. If you think your cousin might be receptive, a gentle approach might work: "Hey, I'm concerned about what you told me about your taxes. Those penalties can be really serious." But if they've shown they don't care about the rules or might become defensive, then you're right that a direct confrontation might not help the situation.

Is there any way to find out what happened after you submit a tip? Like do they tell you if they investigated or collected more tax? I reported an employer a few years ago who was paying people under the table but never heard anything about what happened.

Is there any downside to just using the last paystub numbers to file and then amending later if needed? I'm in a similar situation and really need my refund ASAP.

Absolutely do not file with paystub numbers! The IRS requires the actual W-2 information, and filing with estimated numbers is a quick way to get your return rejected or flagged for review, which would delay your refund even more. Paystubs often don't reflect all taxable benefits, retirement contributions, or other adjustments that appear on your W-2. The differences might seem small, but they can impact multiple calculations throughout your return. Filing with incorrect information and then amending is much more work and typically delays any refund by months rather than weeks. The amendment process is currently taking 16+ weeks for processing in many cases.

At my company we got them to compromise by having a designated "pickup day" where anyone who wanted their W-2 in person could come get it, and they mailed the rest. We just had to email HR in advance to get on the pickup list. Maybe suggest something like that?

Is the cover letter something official or just a note explaining things? And should it go inside the envelope or attached to the front of the forms?

It's just a simple note explaining your amendment - nothing official. Something like "Enclosed is my amended 2024 state tax return to include a previously omitted 1099 form for interest income." It should definitely go inside the envelope, usually on top of your forms. I usually just write it on plain paper with my name, address, and tax ID number at the top, then a brief paragraph explaining what changed and why. Makes it easier for the processing folks to route your return correctly and understand what they're looking at. Keep it short and straightforward!

Learned this the hard way too. Also worth checking if your state requires any specific forms for amendments beyond just marking the "amended return" box on the regular form. My state (PA) has a completely separate form you have to include.

Exactly! And some states want you to include a copy of your original return along with the amended one, while others specifically say NOT to include the original. The requirements vary so much state by state.

The settlement letter doesn't mention punitive damages, but there is a line that says "including interest accrued" with a dollar amount. So I'm guessing that part is definitely taxable? And good point about previous medical deductions, though we didn't claim any related to this issue.

Yes, the interest portion is definitely taxable - the IRS is very clear about that. You'll need to report that specific amount separately as interest income on Schedule B. It might even be reported to you on a 1099-INT, though not all companies handle the reporting correctly. For the remainder of the settlement, since medical expenses weren't previously deducted, you won't have any "tax benefit rule" complications. That's good news! Still, I'd recommend documenting your reasoning for how you allocated the remaining amount between taxable and non-taxable portions. Written documentation of your good-faith determination can be very helpful if questions arise later.

TurboTax is terrible for settlements. In my experience, you need to use the "Other Income" section and then override their default treatment. There should be a way to enter "negative other income" for the portion that's not taxable. I ended up switching to FreeTaxUSA which handled it better.

So even if I explain to the IRS that I couldn't file accurately because my employer hasn't given me my W-2, they'll still charge penalties if I end up owing?

Exactly. The IRS doesn't care why you couldn't pay on time - they only care that you didn't pay by April 15. Your issue with your employer is separate from your obligation to pay taxes on time. That's why you need to make your best estimate and pay that amount by the deadline. Think of it this way: the IRS considers your taxes due as you earn income throughout the year. The April 15 deadline is already a grace period to finalize everything. So waiting on documents doesn't extend your obligation to pay what you already owe.

I went through this in 2023 and couldn't get the penalties removed despite documenting all my attempts to get my W-2 from my ex-employer. The IRS agent told me it's my responsibility to estimate and pay on time regardless of having the final documents. It really sucks but that's how they enforce it.