That middle ground approach sounds reasonable. I really don't want to blow up my family relationships, but I also can't continue like this. Do you think it would be reasonable to ask my relative to start properly employing me going forward, but not worry about the past years? Or am I legally obligated to correct previous years too?

You technically have a legal obligation to file taxes for all years where your income exceeded the filing threshold. However, from a practical standpoint, many people focus on moving forward correctly while addressing past issues gradually. The IRS generally looks more favorably on taxpayers who voluntarily come into compliance before being caught. If you decide to start filing properly from this point forward, you reduce additional non-compliance issues. Then you might consider filing amended returns for the previous three years (that's typically how far back the IRS looks unless they suspect fraud).

This is so true. My cousin worked under the table for years at a construction job. He fell off a roof and broke his back. No workers' comp, no disability, nothing. His boss completely abandoned him and he ended up on Medicaid with no income. It's been 5 years and he's still fighting for any kind of compensation while being permanently disabled. Don't wait until something happens!

Isn't doing quarterly payments a lot of extra work though? And how would someone even figure out how much to pay? I feel like making the employer fix their mistake is better than creating more work for the employee.

It's actually not too complicated. The IRS has worksheets on the 1040-ES form that help calculate the proper amount. Basically, you estimate your annual income, determine your expected tax, and divide by four. I agree the employer should fix the issue - that's definitely the right long-term solution. But quarterly payments are a good backup plan if the employer continues to drag their feet. It gives the employee protection from underpayment penalties while they fight the larger battle. Better to be proactive than end up with a huge tax bill and penalties next year.

This happened at my company too! Our entire department had the same issue because someone doing a mass upload checked "exempt" for an entire batch of employees. Took months before anyone noticed because people don't always check their paystubs carefully.

Doesn't filing an amended return increase your chances of getting audited though? I've always heard you should avoid amendments if possible.

That's actually a common misconception. Filing an amended return doesn't automatically increase your audit risk. The IRS understands that people need to make corrections or additions to their returns for legitimate reasons. What increases audit risk is when the amendment drastically changes your tax situation or seems inconsistent with your original return. In this case, adding education credits later is a common and understandable amendment that wouldn't raise any red flags.

In my experience, state returns are processed independently from federal returns, even if you file them together. Each state has its own processing system. That's why your state return was accepted while federal was rejected.

Thanks for the suggestion! How did you find your EA? Did you just google local tax professionals or is there a specific directory I should look at?

I found mine through the National Association of Enrolled Agents directory (naea.org). You can search by location and even by specialties like "back taxes" or "IRS representation." I'd recommend calling at least 3-4 of them for quotes and asking specifically about their experience with unfiled returns. Some will also offer free initial consultations where they can give you a ballpark estimate of what you might owe before you commit to hiring them.

This is a really important point. The failure-to-file penalty is 5% of unpaid taxes per month up to 25%, while failure-to-pay is only 0.5% per month. So filing even if you can't pay saves you 4.5% per month!

Thanks for sharing your experience from the management side. Do you think I should start reporting my tips to my employer anyway, even though he specifically told us not to? I'm worried about creating conflict but also don't want to be part of something illegal.

I would absolutely start reporting your tips properly despite what your boss says. Create a simple spreadsheet or use a tip tracking app to document everything. Then submit a monthly tip report to your employer (you can find Form 4070 templates online) and keep a copy with proof of submission. If your boss pushes back, you can simply say that you're following IRS requirements to protect yourself. Frame it as something you need to do for your own tax compliance rather than suggesting he's doing something wrong. Most importantly, document everything in case questions arise later. The reality is that the IRS holds both parties responsible, but you can protect yourself by following proper reporting procedures even if your employer doesn't.

Do you have to report credit card tips too? I thought those were automatically tracked since they go through the POS system. My manager only tells us to track cash tips.