What Causes IRS Suspicions for a 1099 Audit?

• The 1099 form is used by companies to pay independent contractors. During tax season, employers must submit this form for any payments made to contractors for the year. Other uses for the form include reporting dividends, interest, health insurance advance payments and long-term care benefits. The 1099 form can be a source of controversy, particularly for employers who may misuse it. It can also raise the suspicions of the IRS for those who fail to include it with their tax returns.

1099 Classification Error

• According to the accounting firm of Michael Martin EA, LPA and Associates, PC, the IRS has increased its audits of employers because of lost revenues due to filing the 1099 form as opposed to the W-2 form. By filing a 1099 form, employers do not have to pay or report federal or state taxes, unemployment premiums, or Social Security and Medicare taxes. Ultimately, the IRS loses money in this scenario and, consequently, has penalized businesses for improperly filing 1099 forms.

Failure to List Forms

• Not reporting income or failing to include information the IRS considers important are obvious reasons to alert the IRS. However, as it relates to 1099 forms, certified public accountant Greta P. Hicks states that not reporting extra income from bank interest, securities sales and dividends can cause the IRS to audit your tax returns. (See References 3) Generally, if you fail to properly include information on 1099 Form INT (interest income), 1099 Form B (sale of securities) and 1099 Form DIV (dividends) and the failure to include these forms with your tax return -- particularly if these forms of income are included on your primary tax return -- you should expect a review from the IRS.

Foreclosures

• Whenever there is a foreclosure, mortgage lenders are required to file Form 1099-A (acquisition and abandonment of secured property). Also, mortgage holders are required to file this form. However, recent abuses by lenders have caused distress and undue financial loss for many mortgage holders. This abuse includes withholding information that is needed to complete this form from mortgage holders. Yet, according to an article for the USA Tax Aid Blog, the IRS does not target lenders. To avoid an audit, it is imperative that you be vigilant about receiving the documentation and information that you should have following a foreclosure, such as cancellation of debt verification.