5 Red Flags That Trigger a 1099 Audit

When you’re self-employed or hiring independent contractors, the last thing you want is a knock on the door from the IRS. But 1099 audits are on the rise and they’re not just targeting big corporations.

In fact, many small business owners, healthcare providers, and consultants are being flagged for things they didn’t even realize were audit risks.

Here’s how to stay ahead and how working with an online bookkeeper, certified bookkeeper, or CPA bookkeeper can keep you compliant and protected.

What Happens During An Independent Contractor Audit?

If you’re audited by the IRS or state tax authority, the main thing they’re looking for is misclassification, specifically, whether you’ve treated someone as a 1099 contractor who should legally be a W-2 employee or wheter you are operating as a 1099 contractor but behaving like a W-2 employee.

Auditors don’t just review your 1099 forms, they look for patterns.

• Did you or the person work full-time hours?
• Did they only work for you/ Did you work just for one company?
• Were they/ you expected to follow a schedule or report to a manager?
• Were contracts missing or inconsistent?

They’ll also examine your bookkeeping, 1099 forms, and whether proper taxes were filed (especially if you also have employees). A mismatch can lead to thousands in back taxes, penalties, and even legal consequences.

Tax Audit Help: Why the IRS Cares

So, why does the IRS pay so much attention to 1099 contractors?

Because when workers are classified as contractors, businesses aren’t responsible for payroll taxes, unemployment insurance, or benefits. If the IRS believes you’re avoiding taxes by misclassifying workers (even accidentally), they’ll investigate.

And with the gig economy booming, the IRS is more focused than ever on closing this gap. If you’ve issued multiple 1099s, operate in a cash-heavy industry, or have fluctuating income, it’s time to tighten your financial systems.

Understanding 1099s: The Basics

Here’s the rule:
If you pay a non-employee $600 or more in a calendar year, you are legally required to issue them a 1099-NEC form.

This includes:

• Freelancers
• Contractors
• Locum providers
• Real estate professionals
• Medical professionals paid per shift

Failure to issue these forms or doing it inconsistently, is one of the biggest red flags the IRS watches for. And if your books are messy or your contractor relationships are undocumented, it raises even more concern.

This is where having a bookkeeping pro or business bookkeeping services provider makes a huge difference.

IRS Audit Help: Common Audit Triggers

Misreporting Your Income

If your income reporting is inconsistent for example, you round off numbers, forget a side hustle, or underreport revenue on your Schedule C, it can trigger an audit.

The IRS cross-checks reported income against what clients or vendors report through 1099s. Any gaps? They’ll flag it.

Mismatched Income Reports

If there’s a difference between what you report and what your contractors report, or if your 1099 forms don’t align with your accounting, the IRS may assume something is off.

An online bookkeeper helps prevent this by reconciling your books monthly and ensuring all documents match.

Excessive Expenses

Claiming too many deductions, especially for things like travel, meals, or home offices without documentation can raise eyebrows. If your business appears to be living large while reporting minimal income, the IRS may take a closer look.

A certified bookkeeper ensures your deductions are legitimate, well-documented, and categorized correctly.

Large Amounts of Cash Transactions

Cash-heavy businesses like salons, gyms, private practices, and some entertainment services are more prone to audits. Why? Because cash income is harder to track and easier to underreport.

If you’re handling lots of cash without clean records, the IRS may suspect hidden income.

Claiming Business Losses Each Year

If your business has reported a net loss for three years in a row, the IRS may question whether it’s actually a business or just a hobby being used for tax write-offs.

This is especially risky if you’re self-employed or a contractor working solo. The IRS expects your business to be profit-driven.

IRS Tax Audit Help: Best Practices to Avoid Being Audited

Avoiding an audit isn’t about being perfect… it’s about being proactive and prepared. Here’s how to reduce your risk:

✅ Issue 1099s consistently: For every contractor paid over $600
✅ Keep signed contracts on file: Especially if you hire recurring 1099s
✅ Track income and expenses monthly: Not just during tax season
✅ Avoid aggressive deductions: And always back them up with receipts
✅ Separate personal and business accounts: Always
✅ Work with a professional: Like a CPA bookkeeper who knows the system

If you’re unsure what qualifies as deductible, or whether you or someone in your business should be W-2 vs 1099, don’t guess, ask.

How NTC Accounting Firm Can Help

At NTC, we’ve helped:

• Independent contractors under IRS investigation clean up years of back taxes
• Physicians audited over 1099 misclassification reclassify their structures properly
• Small real estate businesses with missing 1099s rebuild their records from scratch
• Consultants and creatives develop tax strategies that keep them audit-proof

And if you run a larger business or receive a formal audit letter, we can connect you with trusted forensic accountants and tax attorneys in our extended network, people we’ve worked with for years.

We’ve helped clients in:

• Healthcare (CRNAs, NPs, locum providers)
• Real estate and construction
• Content creation and entertainment
• E-commerce and consulting

We not only offer IRS tax audit help, but we also offer financial partnership… the kind that keeps you compliant and tax-savvy.

Because the truth is:
🔺 A small error today can lead to thousands in fines next year
🔺 Misfiled forms can hold up loans, licenses, and funding
🔺 Getting it wrong can cost you more than just money, it costs peace of mind

📌 Want to stay audit-free and sleep better at night?

Our business bookkeeping services, tax planner CPAs, and audit support specialists are here to help.

We don’t judge. We don’t overwhelm. We don’t disappear after tax season.

We guide you, fix your systems, and help you pay less tax, save more income, and stay on the IRS’s good side.

👉 Schedule your free no-pressure consultation.
Let’s get your books clean, your filings accurate, and your risk down to zero.