One of the most common reasons for IRS desk audits is incomplete or inaccurate 1099 reporting. Many businesses overlook the importance of this step and do not realize that missing or incorrect documents can result in serious repercussions. In this post, we will discuss some of the most highly missed source documents that cause IRS desk audits and how to properly report 1099s to avoid such situations.
Firstly, it is important to understand the difference between an independent contractor and an employee. The Internal Revenue Service (IRS) distinguishes between the two and requires business owners to correctly categorize their workers in order to avoid penalties and fines. This topic is detailed in Tax Topic 762 available on IRS’s website. Ensuring that the workers are classified correctly can also avoid unnecessary audits since employee and employer taxes are predicted through the correct classification.
Secondly, businesses must carefully choose between a 1099-MISC and 1099-NEC while reporting. Previously, the IRS used the 1099-MISC form to report non-employee compensation, but this form was replaced with 1099-NEC for the 2020 tax year onward. The new form permits reporting in a more focused way. Confusion between these two forms can result in errors that could trigger an audit. It must be noted that any business that has paid more than $600 to a non-employee in 2023 must send a 1099-NEC by February 1, 2024.
Thirdly, eFile is mandatory for over ten 1099 forms. The IRS is transitioning from FIRE to IRIS, which allows individuals to file up to 20 forms at once, making it easier for businesses to submit multiple forms at once. This electronic system is faster and reduces the likelihood of mistakes. However, businesses in Arizona, North Carolina, and North Dakota cannot participate in the Combined Federal/State Filing Program, and, therefore, must file independently.
Lastly, BFG Tax Help is a resource to help businesses avoid mistakes that can lead to an audit. This service is knowledgeable in the requirements and expectations of 1099 filing. There are many risks associated with filing these forms incorrectly, including the possibility of being fined. BFG Tax Help can provide businesses with the support they need to be more confident in their filings and reduce the likelihood of incurring fines.
Overall, understanding the importance of correct 1099 reporting is the best way to avoid an IRS audit. This can be achieved by understanding the difference between an independent contractor and an employee, selecting the correct form, e-filing when necessary, and considering BFG Tax Help to review the filings. Businesses cannot afford to make mistakes while filing 1099s. For many companies, these forms are essential in determining the tax structure and can be a significant financial issue if done incorrectly. By learning these principles, businesses can be more confident in their reporting requirements and develop better tax strategies that can ultimately save money.