OK, here are a few ideas for your (your wife's) letter .....................
1. I think you need to ask for a transcript of her account in order to see what has been computed as owed, the tax
& penalty amounts. Unfortunately, when you don't file, the IRS
makes up the numbers based either upon the gross income
reported to them (in your case on the 1099s) or on a prior year's gross, often increased by some factor - 25%+ . In other words, the tax & thus the penalties & interest are based upon ficticious numbers & you may not even owe the taxes that they say you do.
2. In regards to any years that you didn't file at all, you can still file & use the correct numbers for the actual 1099s as well as any personal exemptions
and the standard deduction
that you were entitled to. Obviously, you are going to need someone to review the transcripts (you may receive a separate one for each year involved) in order to determine if it is worthwhile to pursue. Any CPA can look them over, ask you a few questions & determine if it is worthwhile to attempt to get the amounts adjusted based upon how they computed the tax.
3. If it comes down to the penalties only which have been assessed (in other words the tax is correct & interest they can't reduce unless the tax gets reduced) then it is probably worth writing a letter of explanation to attempt to have the penalties reduced.
Most likely you have been assessed penalties for failure to file (5% a month to a max of 25%), failure to pay (1/2% a month to a max of 25%); plus there are other penalties for failure to make estimated
taxes & some others that I won't mention at this point.
The thrust of any letter attempting to get the penalties reduced should point out:
1. You thought you were an employee & taxes were being withheld; you were very young & inexperienced; it was one of your first full time jobs; you never thought you were self-employed - didn't even know what that was -; you didn't own the business; you worked regular hours; you were told what to do & how to do it; you were supervised by your "boss" and reported your progress with his assignments several times during each work period; didn't understand the difference between a 1099 & a W2; so you should be saying things like....................
I respectfully request that the penalties for failure to pay the tax when due be abated for the reasons outlined;
You can point out that you thought your employer had "paid all the tax that you owed by withholding
them from your pay"; you never got any breakdown of your paychecks but since you were hired as an employee you presumed a businessman would be taking care of everything that he was supposed to do with your taxes;
You were only 19 at the time & were intimidated by your boss & didn't want to question him about how your pay would work; you were just glad to have a job & didn't want to cause trouble or lose your job.........................
You want to say that you fully expect to pay all the income
tax that you owe, but you don't feel you should be penalized for someone else's failure to treat you as an employee when in fact that what you were & to attempt to say that you were self-employed (which is what you now understand your former employer has done by sending you 1099s rather than withholding income taxes
& sending you a W2 like he should have (in order to save himself payroll taxes
) is patently wrong & a complete misrepresentation of the facts or your employment.
So, what you should do now is to look over this material which I've summarized based upon what your husband told me & put it in your own words & write a letter to see if you can get the penalties reduced.
However, you really should have someone determine what it is you actually owe, what the breakdown is, how much you've already paid toward the bill & basically where you stand.
It sounds like it may be worthwhile to pursue this as there is a lot of money involved.
I wouldn't worry about drawing any particular attention to your husband's & your income tax situation now; this all involves past year's problems before you were married.
Hope this helps & if you need any additional assistance, I'll be glad to help if I can. Good luck, I know this is a giant PIA.