nextSource shares how your independent contractor’s tax returns may lead the IRS to investigate the Form 1099 you issued and then perhaps audit you because of the irregular deductions on your independent contractor’s tax returns. It writes:
In 2014, more than 24 million tax returns of self-employed sole properties were audited, which represents a statistically significant 15% of the total audit population that year. When these audits are conducted, the IRS is almost invariably led to the companies issuing the contractors’ 1099s. This activity has become known colloquially as the “backdoor audit” because it provides the IRS a pretext for examining the tax reporting of companies they might wish to audit, but for which they have no specific reason to examine.
This is yet another reason why strong IC classification protocols are mission critical to workforce management programs. If workers are incorrectly classified as employees, the results of misclassification can be far greater than just a headache for the individual triggering the audit. Things occurring during an audit of one of your ICs can lead back to your organization. For example, when the IRS looks at these workers’ sources of income, they’ll be focusing on such points as whether the contractor had received both a W2 and a 1099 within a single tax year. They may look at if the contractor claims your organization as their only client/source of income.
Yet, there’s not much influence a company can exert over how its contractors file their taxes. So how does one protect the organization from the backdoor audit? The best thing one can do is to engage an expert, impartial firm such as nextSource to help your organization safely engage independent contractors. If workers are not able to meet the IC classification threshold, companies may still employ their services via arrangement with an employer of record.
Read the full story at Why Your ICs’ Tax Returns Could Spell Trouble