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.

Thanks for sharing that! That's exactly what I was worried about. Did your brother have to file an amended return or did the IRS just send him a bill?

The IRS sent him a CP2000 notice showing the discrepancy and their calculation of what he owed. He had the option to dispute it or agree and pay. Since it was legitimate income he hadn't reported, he just paid the amount. It wasn't catastrophic, but definitely more expensive and stressful than if he'd just reported it correctly the first time. The peace of mind from doing it right is worth the extra effort now.

This is great advice. I had a similar issue and found out the payroll records were being maintained by a third-party processor even though the business was gone. Might be worth checking if you know what payroll service they used.

Do you think the CPA could get in trouble if OP reports him to the state board? My tax guy messed up some stuff too and I'm wondering if I should report him.

Yes, CPAs are licensed professionals who can face disciplinary action from their state boards for substandard work. The severity depends on whether this was a simple mistake or represents a pattern of incompetence. Before formal reporting, I'd recommend clearly documenting the errors in writing and giving the CPA an opportunity to correct the issues or adjust their fee. Most licensing boards want to see that you attempted to resolve the issue directly first. If they're dismissive or refuse to acknowledge clear errors (like taxing unrealized gains), then reporting becomes more appropriate. Make sure you keep copies of all communications and the incorrect tax documents to support your complaint.

I tried a couple different options but ended up using Koinly for tracking all the transactions and calculating the gains/losses. It was pretty intuitive for importing from different exchanges. Then I just took those totals and put them into FreeTaxUSA for the actual filing. The whole process was definitely time-consuming upfront but now that I understand it, next year should be much easier. I also created a detailed spreadsheet where I documented everything so I have backup records. The most annoying part was figuring out the staking rewards since they count as income at the fair market value when received. The tax software I used makes it pretty clear where to report everything.

Thanks for this advice! I pulled my credit reports right after reading this and thankfully don't see any suspicious accounts or inquiries. I've already frozen my credit at all three bureaus and filed the FTC complaint. Would you still recommend filing a police report even though there don't seem to be any other signs of identity theft beyond the fake W-2s?

Absolutely still file a police report. Even if there aren't currently other signs of identity theft, having an official police report will be extremely helpful if anything else pops up later. It creates a timeline and official documentation of when you first discovered the identity theft. Some identity thieves are specifically targeting tax fraud without touching credit because it can fly under the radar longer. The fact that they've filed W-2s using your SSN at multiple law firms suggests this is a sophisticated operation, not just a random scammer. These operations often sell stolen identities on the dark web, so other issues could surface later. Having that police report now establishes you as a victim from the start.

I had something similar happen but with medical offices. Turned out the person who stole my identity worked in medical billing. The IRS agent told me scammers often pick industries they're familiar with because they know how to manipulate those specific payroll systems or have inside access.

That's a really good point I hadn't considered. I do have the confirmation letter from the IRS acknowledging my S-corp election, so I should be good on that front. But it's definitely something important to verify. Do you know if there's any specific form I should use to document the distributions to myself when I file my taxes? Or does it just flow through automatically on the K-1?

Good to hear you have your confirmation letter! For documenting distributions, they'll show up on your Schedule K-1 (Form 1120-S) in Box 16, Code D. There's no separate form you need to file specifically for the distributions. The K-1 will flow to your personal tax return. Just make sure you maintain good corporate records with minutes documenting the distribution approval. Also keep a running basis worksheet so you can track your basis from year to year - this becomes really important if you ever put additional money into the business or take distributions larger than a single year's profit.

Yep and industry matters a lot! For example, if you're in a service business where YOU are the primary value (consultant, lawyer, doctor), you generally need a higher salary percentage compared to someone in a capital-intensive business. I've seen the IRS successfully challenge cases where professionals tried to take 30% as salary and 70% as distributions.