I need someone with international employment/tax experience to be able to estimate risk based on reviewing the complete details of my exact situation, an abbreviated version of which follows below.
I got a letter from IRS asking me to verify the employment income and withholdings I reported on my 2018 federal return. I reported the income as being from employment because the relationship seemed to me to be employer-employee, but I'm I may have been mistaken.
The employer is a Chinese company located in China. I first started working for them in early 2014, when I moved there to live and work as a regular employee. The long term plan as understood by me and the CEO was that I would help out in China for up to 18 months and then return to the US to work remotely for the company to help set up their US subsidiary, where I would then transfer to as their regular full time employee. After only 9 months, I found that I was getting sick too often from the food and the tropical heat and humidity, so in 2015 I switched to working remotely for the same company, about 50% in Canada and 40% in US. I passed the physical presence test for a foreign tax home, and still paid taxes in China, so I'm not worried about 2015.
From 2016 to mid 2018, I worked remotely from my home in the US for the same company, with occasional trips to China. My employment contract was renewed after I returned to USA, and looked exactly the same as the contract I signed with them in 2014 when I was actually living and working in China. In addition, the company renewed my China Residence Permit and work visa twice after I returned to the US. It was made clear to me that they did this because they needed me to remain a regular employee in order for them to continue to receive grant from the Chinese city government to help pay my salary. However, they did not give me a W-2 and did not withhold any taxes after I returned to the US.
For 2016, 2017 and 2018, I entered my salary (~$80K/year) and tax withholdings (zero) shown on my year-end compensation statements into the W2 form on TurboTax, thinking that the year-end statements were what the IRS calls a "nonstandard W2".
My 2016 AND 2017 returns were accepted by IRS without any questions, but they want me to send them information to substantiate my 2018 return. It was suggested by someone at TurboTax that I might want to simply tell IRS that I was mistaken about the employee-employer relationship and should have reported my 2018 income as being from self-employment. But I'm worried that however I respond to their letter, it might trigger a review of previous years' returns.