My husband worked as a contractor for 2 years and we would pay our own taxes in installmentsto the IRS ourselves. The state of CA then required the employer to reclassify them as employees for 2005 . They were reclassified as employees in September 2005 but the employer paid his share of ss and medicare for the entire year and so we were given a w2 for the whole of 2005 although we only had fica taxes withheld from September till the end of December. We did our taxes on Taxcut and received a refund. It did not recalculate that we still owed fica taxes from January till September and so we were unaware.
We have now received a letter from the ex-employers accountants stating that he has been audited and that the IRS had requested the extra fica to be paid either through him or auditing us. We have not heard from the IRS directly. We have now been put in a situation owing a large sum of money which if the employer had made us aware of when my husband was working for him we would have made alternate arrangements when he changed his wages drastically to account for being an employee instead of an independent contractor. Should we pay or wait for the IRS to contact us?

The IRS will NOT be contacting you. The accountant and employer is counting on your ignorance to pay your "share" of the FICA taxes for the time in question.

It does NOT work that way. The IRS holds the employer responsible for paying and collecting the FICA taxes correctly and in a timely manner. The employer failed to do so, and got caught. The IRS will expect the employer to pay all back taxes, and the employer has NO LEGAL STANDING to collect your share so late.

You can contact the IRS to verify what I have just told you.

We did contact the IRS and talked about the section on underwithheld taxes in Pub.15. (pg 27).They were not that knowledgeable and recommended that we pay him to avoid being sued. It seems as if the IRS attitude is that as long as they get the money from the employer they do not care how he then tries to recover his money from us. In Pub.15, it talks about about how the employer can make up the underpayment from the employees' further wages but it does not address what happens when you no longer work for that employer.
Any advice is greatly appreciated.

First, did you not pay Self-Employment Tax? Presumably you did, and that substitutes for social security tax.

Second, employers can recover the FICA later from employee paychecks.

We paid our own taxes from Jan to Sept but then the employer made us employees retroactively so we filed a W2 for the entire year. On the IRS website it says that employers who misclassify employees as contractors are liable for underwithheld taxes but I can not find any guidelines as to whether they can then recover those taxes when the employee no longer works for them.
From IRS website: "When an employer does incorrectly classify an employee as an independent contractor, the employer is still responsible for paying the employee’s federal income tax withholding and the employee’s share of Federal Insurance Contributions Act (FICA)/Railroad Retirement Tax Act (RRTA), even if it was not withheld from the employee’s wages. The employer still must pay the employer’s share of matching FICA/RRTA and Federal Unemployment Tax (FUTA). Penalties and interest may also apply."

TaxSearcher and I agree on many things, but this is not one of them.

Unless you made an active attempt to deceive the employer, you should not and, In my opinion, legally CANNOT be held responsible for the employee's portion of these unpaid taxes because, at the time of the wages being earned, you were NOT CONSIDERED TO BE AN EMPLOYEE. The fact that this was an incorrect consideration was not your fault, so you should NOT be held accountable or suffer any consequences.

To make you pay for this would be to punish you for the employer's bad act, which was an attempt to avoid paying his share of the FICA taxes.

In my opinion (for what it is worth because, remember, I am not an attorney), the employer has no legal ground to stand on. If he sues, you should countersue and subpoena the IRS agents who handled the case to testify on your behalf.

Better yet, call a lawyer who specializes in either employment tax and/or labor law to get it from the horse's mouth.

Maybe I am missing something here but I think you either 1. file an amended return to claim back yourself employment tax (paid when you were a contractor) and then pay the employee FICA share or 2. credit between the self-employment tax and the employee FICA.

Taxsearcher, all the literature I am reading on the IRS website says that if an employer wrongly classifies an employee as a contractor (which is what happened) then the employer becomes liable for the FICA even if they were not withheld at the time. I am reposting what I read on the IRS website "When an employer does incorrectly classify an employee as an independent contractor, the employer is still responsible for paying the employee's federal income tax withholding and the employee's share of Federal Insurance Contributions Act (FICA)/Railroad Retirement Tax Act (RRTA), even if it was not withheld from the employee's wages. The employer still must pay the employer's share of matching FICA/RRTA and Federal Unemployment Tax (FUTA). Penalties and interest may also apply."
It is also a question of fairness. The employer surely has a duty to know what taxes should be being withheld and make us aware if they are not. We do not work for this employer anymore and believe that if there were any tax irregularities then they should have been addressed at the time of employment not a year and a half later.

OK, I didn't write the law and I'm not going to argue it with you -- employment tax is not my specialization and it is not a strong interest of mine. It would be best to get an attorney in this case. However, also note the following (emphasis added):

Section 3101 of the Code imposes FICA tax on an employee. Section 3102 requires an employer to collect the tax imposed by section 3101, and also makes the tax a liability of the employer. Thus, both the employee and the employer are liable for the employee's share of FICA taxes, although the intent is that the employer will collect it from the employee and remit it to the Government. Regardless of whether it is the employer or the Government who collects it from the employee, the employee is ultimately liable for the tax imposed by section 3101. Section 31.3102-1(c) of the regulations. (Rev. Rul. 86-111, 1986-2 CB 176)

You should be able to offset the self employment tax you have already paid against your FICA liability (ask your attorney about section 6521.

I agree that we will probably have to consult an attorney. I'm not trying to argue, just seeing what our liabilities are. I have been referred to Internal Revenue Code 3509 which deals with employers who misclassify employers which is what happened in this case. We did not pay self employment tax because the State of CA made him back date our employee status from the beginning of 2005 so therefore all our wages were on a W2.

Final say on this: I do not think you are liable. Making you liable rewards the employer's bad act, which is niether the law's nor the IRS' intent on such issues.

That said, you NEED to get an attorney involved.