Who is responsible when employees are "paid under the table" and the IRS audits?

So if my friend starts reporting the income now, can they get in trouble for the previous years they didn't report? Also, would it be better to file as self-employed or as an employee using that substitute W-2 form you mentioned?

For previous years where income wasn't reported, your friend could potentially face issues. The IRS generally looks back 3-6 years during audits, sometimes more if they suspect fraud. The best approach would be to file amended returns for those years using Form 1040X along with the substitute W-2 (Form 4852). Regarding whether to file as self-employed or employee, this depends on the actual working relationship. If your friend is truly an employee (the business controls when, where and how they work), then using Form 4852 as a substitute W-2 is more accurate. Filing as self-employed when you're really an employee is misclassification, which creates another issue. The downside is your friend would pay both the employee and employer portions of FICA taxes (15.3% total instead of 7.65% for employees).

Did they help you figure out if you were actually an employee vs contractor? My situation sounds similar and I'm confused about which forms to use since my boss never gave me any tax documents.

This sounds too good to be true honestly. How does some website know what the IRS is going to do? Did they actually help you avoid penalties or did you still end up paying a bunch in back taxes?

Yes, they helped me determine my proper classification by analyzing my work arrangement details - like how much control my boss had over my schedule, whether I used my own equipment, and if I worked for multiple clients. Based on those factors, they confirmed I was legally an employee despite being paid like a contractor. They definitely didn't promise I could avoid all penalties - that would be impossible since I had unreported income. What they did was help me take the proper steps to minimize problems by filing correctly. I still had to pay the back taxes I legitimately owed, but by voluntarily correcting the situation before being audited, I was able to avoid some of the more severe penalties that come with waiting until the IRS catches you. The peace of mind from getting everything straightened out was honestly worth it.

Wait, how does this actually work? Does it just keep dialing the IRS for you or something? I've been trying to reach someone for 3 weeks about a similar issue.

Yeah right. Nothing can get you through to the IRS faster. They're notoriously impossible to reach. I've literally tried calling at 7am when they open and still get the "call volume too high" message. I'm skeptical this is anything more than another scam.

It uses an automated system that essentially waits on hold for you. You enter your phone number, and when they secure a place in line with an IRS agent, it calls you and connects you. It's basically like having someone else wait on hold instead of you having to listen to that horrible hold music for hours. I was skeptical too, but the IRS phone system is just overwhelmed - it's not that they don't have agents available eventually. The service just handles the frustrating part of getting through the initial barriers. When I used it, I was connected to an actual IRS agent who answered my questions about my unreported income situation. They didn't ask for any personal info beyond my phone number to call me back when an agent was reached.

Thanks for mentioning the Section 3509 relief - I hadn't heard of that! Would my friend need to prove they were actually an employee vs contractor to qualify? And how would they do that without any official paperwork from the employer?

Yes, your friend would need to establish that they were truly an employee rather than an independent contractor. The IRS looks at several factors to determine this classification, primarily centered around behavior control, financial control, and relationship type. Evidence can include things like set working hours, using the employer's equipment, receiving training, being told how to do the work, being paid by the hour rather than by project, working exclusively for this employer, and any written communications that indicate an employer-employee relationship. Text messages, emails, or witness statements from coworkers can help establish these facts. They can file Form SS-8 (Determination of Worker Status) to have the IRS make an official determination of their worker classification, which can support their claim for Section 3509 relief.

That's an excellent point. There are whistleblower protections for tax issues though, right? Would those apply in this situation?

There are some protections, but they're limited in this context. The main whistleblower protections for tax issues typically apply when someone reports tax fraud by their employer to the IRS for potential rewards. In this case, your friend would be correcting their own tax situation rather than actively reporting the employer. However, if the employer retaliates by firing them for properly reporting income, that could potentially violate labor laws depending on the circumstances. North Carolina is an at-will employment state, but there are still some protections against retaliatory discharge for exercising legal rights. The reality is that your friend is in a tough spot - continuing to not report income is illegal and risky, but properly reporting it might create workplace tension. That said, the legal and financial risks of continuing to hide income from the IRS far outweigh the employment risks. Better to deal with a difficult employer than face potential tax evasion charges down the road.

This is really solid advice about documentation! I'm actually in a similar situation and hadn't thought about saving text messages about work schedules. My boss is always texting me about what time to come in or asking me to work extra hours - I guess those could be important evidence that I'm not really an independent contractor. One thing I'm wondering about though - if I start gathering all this documentation now, does that look suspicious if the IRS ever investigates? Like would they think I was planning something? Or is it just smart to have records of your working relationship regardless? Also, you mentioned looking for other jobs as a backup plan. How do you handle job interviews when your current employer has been paying you under the table? Do you have to explain the situation to potential employers, or can you just list the job experience normally?

Great questions! Documentation is always smart business practice, so don't worry about it looking suspicious. The IRS actually expects people to keep employment records - it shows you're being responsible, not scheming. Text messages about schedules and work duties are perfect evidence of an employer-employee relationship. For job interviews, you can absolutely list your work experience normally. You don't need to volunteer that you were paid under the table - just focus on your skills and accomplishments. If directly asked about tax documents or references, you can say something like "My current employer handles payroll informally, but I can provide work samples and discuss my responsibilities." Most employers won't dig into the payment methods of your current job during interviews. The key is to start documenting everything now while also protecting your future. Keep copies of anything that shows your boss controls when/how you work, uses company equipment, sets your schedule, etc. Even seemingly minor things like texts saying "come in early tomorrow" or "use the company truck for that delivery" help establish you're an employee, not a contractor. Also consider opening a separate savings account and setting aside money for the taxes you'll owe when you start reporting properly. This way you're financially prepared to make things right with the IRS.

This is really helpful information about North Carolina's voluntary disclosure program! I didn't realize states had their own programs that could work alongside federal corrections. One question about the "First Time Penalty Abatement" - would that still apply if my friend has technically been non-compliant for multiple years, even if it wasn't intentional? Or does the IRS look at this as one continuous issue rather than separate violations for each tax year? Also, when you mention working with a tax professional experienced in worker misclassification cases, are there specific credentials or specializations I should tell my friend to look for? I want to make sure they don't end up with someone who doesn't really understand these types of situations. The timeline advice is spot on though - I can see how waiting just makes everything more complicated. Better to deal with 4 years of back taxes than let it become 5 or 6 years down the road.