In the past few years, the IRS has been cracking down especially on tax mistakes for a number of reasons. After the financial recession, many businesses chose to hire freelancers and contractors to avoid paying full-time benefits, causing an increase in the number of 1099 forms sent out, and since many families were struggling with finances, there was even more incentive to cheat on income levels. In fact, a recent Wall Street Journal article explained that the number of 2012 audits of paper forms increased by 13 percent from the year before – giving the IRS more than $200,000 in payments. While it has been known that with proper documentation and honest reporting many Americans can avoid an audit, there are still extra steps taxpayers can take to ensure their records are clean.
For those filing 1099 tax forms, it is extremely important to list ALL your income – no matter how small. "The IRS has matching software that can help it catch any income that was reported under your Social Security number but that wasn't listed on your tax return," the article explained. "That includes investment income, payments for freelance work, and interest earned on a bank account."
This includes nannies, too, which can often be overlooked. If you are paying a household worker more than $1,800, and they are not a parent, child and are over the age of 18, must also be reported.
And, as always, simple mistakes can cause the IRS to look more closely into a taxpayer's records, and potentially find other mistakes or discrepancies. For companies with freelancers and contractors, e-filing through a 1099 processing services can also cut back on the calculation and handwriting mistakes, avoiding a potential audit.