This paper analyzes the role played by the firm in tax compliance. The IRS cannot observe the worker's income, and so the employer has to report the worker's income to the IRS. The IRS can audit the worker when there is a possibility of tax evasion. We argue that the report made by the employer can become a tool used to control the worker's incentive to work. Compared to the second-best contract, it is possible that the employer can promise to report a lower wage income and induce the worker to put forth more effort, when the IRS audits the worker less frequently. Both the employer and the worker may be better off under such a reporting system.