employer withheld, now claims they didn't

[ccr]

My husband started a new job at the beginning of last year. He was hired as an employee, and taxes were withheld from the start (although for the wrong state). In the fall, the company changed hands or SOMETHING and changed names, and the paycheck stubs no longer showed the withholdings, but they were still withheld. We did not receive the W-2, and I had my husband go and demand it on 2/8/08. He received a 1099 showing no taxes withheld and was told they were sorry - it was an accounting error and they have no way of fixing it. They withheld over $8000 which we will now owe. They say we will be repaid the amount withheld. Won't we still have to pay penalties and the self-employment portion which we should not be liable for? And since he is, in fact, an employee, this is illegal, so what do we do?

You may file in court if need be.

Report that to the IRS and your nearest dept of labor office.

Actually just telling the company that is what you are doing may resolve it.