W-2 box 1 and box 12 code II don't match

[shoder]

Last year my wife started to get paid as a live-in care worker for our daughter.  Unfortunately, the Difficulty of Care Federal Income Tax Exclusion form for IRS Notice 2014-7 was filled out incorrectly and the company handling payroll started taking taxes out the first couple of months.  

We got the form updated so they stopped taking out taxes.  Now the W-2 shows the income in box 1 with federal taxes withheld in box 2 and an amount in box 12 with code II for tax-exempt Medicare waiver payments from In-Home Supportive Services (IHSS).  The problem is that the amount in box 12 is less than the amount in box 1 due to the Difficulty of Care form being filled out incorrectly for 2 months.

All of the income in box 1 was IHSS income.  How do I correctly report that all of the income was IHSS?  I want to get back the taxes that were incorrectly paid.

-  If I enter box 12 with code II in the W-2, the checkbox for "Nontaxable Medicaid waiver payments..." doesn't appear in the "uncommon situations" section and I'm not able to enter the difference between box 1 and 12 anywhere.

-  If I don't enter box 12 in the W-2, I am then able to select the checkbox for "Nontaxable Medicaid waiver payments..." and specify that everything in box 1 is difficulty of care payments.

If I don't enter box 12, will my return get flagged since the submitted W-2 won't match what the payment company submitted?

[DavidD66 · Accepted solution]

What you need is a Corrected Form W-2.  Have you attempted to get a  W-2c from the company that was handling the payroll?  Unless you report the W-2 exactly the way it is filled out, it won't match what was transmitted to the IRS.  Another option would be to go ahead and file, attempt to obtain a corrected W-2.  If you do get a W-2c, you file a very simple amended return due to the W-2c.  If you don't get a corrected W-2 you file an amended return with changes that result in your getting your full refund.  All amended returns are processed by a person, even if e-filed, so it won't result in an automatic change like it will if you don't report the W-2 correctly.  

[shoder]

Thanks.  I suspected those were my options.  Unfortunately, the company handling payroll won't send a corrected W-2, so I'll have to submit with box 12d having the lower number and then send in an amended return.

Thank you.