All employees, which easily includes unskilled laborers and most (near) minimum wage hourly workers, expect their W-2 Form in January.
On the W-2, the employer reports last year’s wages and taxes withheld, employee benefits, etc. Those numbers are reported to the employee, the Social Security Administration, and to the Internal Revenue Service. This is the only standard method by which IRS and SSA know what amount of tax was withheld and paid over for that employee. The W-2 Form is obviously critical a document.

Why Would My Employer Send a Form 1099 Instead?

Unfortunately, some employers don’t always report or pay those taxes. At Tax Law Offices, we hear about numerous cases every year where some employer simply reported the earnings on Form 1099 instead of Form W-2. Unfortunately, if this happened to you, it may be the product of mistake, or possibly payroll tax fraud.
Example: An employee, Anna, receives $10 per hour to answer telephones for a call center in Lisle. After an 8-hour day, for 5 days, that employee earned $400. Then her paycheck is reduced by income taxes withheld (federal, state, even city), along with the Social Security and Medicare taxes withheld. Anna’s weekly paycheck is less than $400, because the employer withheld those taxes, to be paid over to the various governments.

But the employer never paid those taxes over. Instead, the employer did not even report them to the IRS and state. And, instead of sending a Form W-2, it reported Anna’s full earnings, without showing the taxes withheld, on Form 1099.

Can My Employer Just Keep My Withholdings That Way?

No, these taxes withheld represent your money held in trust to be paid to the government. (That’s the source of where tax refunds come.) The employer cannot keep the money. So any employer that behaves similarly to our example may either be unintentionally mistaken or just plain intentionally fraudulent.
The best place to begin is with a discussion with the employer, no matter why the problem occurred. It works best for everyone if the employer corrects the misreporting and issues an accurate W-2 form. The employer must correct the 1099 Form as well.

They Won’t Fix the Problem, Now What?

Whether the situation is by criminal tax fraud, or simply by error, there is a fairly simple remedy which does NOT require a tax defense attorney.

The preferred method for resolution is by filing an IRS fraud “Information Referral” on Form 3949-A. The IRS will routinely investigate, and possibly recommend civil or criminal penalties against the employer. More importantly, an analyst will contact you, in order to correct the reporting problem within your IRS account.

Need Help Completing this Form 3949-A?

Let’s go back to Anna’s situation above. In this example, she suspects some occurrence of fraud. As the victim, Anna will report her basic facts to IRS on this Form 3949-A. I would recommend that in Section B, she selects boxes for:

  •  False/Altered Documents,
  • Failure to Pay Over Tax, and
  • Other

Thereafter, included in the “Comments” section, Anna should report her relevant facts, including:

  • That she was an hourly employee, an unskilled laborer;
  • That she was paid as an hourly employee with federal and state taxes withheld;
  • That she was issued a Form 1099 for her employee earnings with no W-2 reporting of those taxes withheld; and
  • That she believes those withholding taxes were never paid over, or never even reported to the government.

For supporting exhibits, Anna would attach to this form a copy of her last few pay statements, plus a completed Form 4852, Substitute for Form W-2, to show how the W-2 wages and taxes should have been reported.

And always, be patient. The problem will take some time to resolve. But taking this first step is the gateway to resolving the problem.

Written by J Anton Collins, JD, LLM (former CPA and former IRS). Attorney Collins is a principal and frequent blogger at Tax Law Offices. If you need assistance seeking a tax resolution, please contact our team of IRS tax attorneys.