Background Check Question - please help
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Let HR know immediately! You can't explain that one away after the fact. Just be direct and upfront. If you tell them, they might overlook it or they might not. But since they can't verify anything you put down on a form with the company's records, you are done if they find out. There are too many people in line behind you for that internship and HR doesn't want to deal with any excuses or ambiguities.
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Any perceived lack of integrity will sink you immediately. Consider what you do, very carefully. If it were me, I would be concerned about the title as well, but that will lead to other questions from them. Have solid, truthful answers.
Do you have any document or email confirming your internship? If so, give them that. I've interned at places that don't exist anymore and where I wasn't paid (no paystub to provide). When I went through backgrounds checks for real jobs, I just provided as much documentation as I could (offer letters, in my case, but an email would probably suffice), and gave them the contact info of my boss (in this case, your cousin). In the end, unpaid internships are often off the books, and small firms close or move very often. This isn't something new to them, though you should definitely be careful, and should at least consider telling them about just how informal the internship was.
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