What's the audit risk of not filing 1099s with IRS for contractors who refused W-9s?

7 This is definitely something you should address. When you claim substantial deductions for contractor payments but don't file the corresponding 1099s, you're creating a potential mismatch that can trigger IRS scrutiny. The IRS uses document matching programs to identify discrepancies, and while they might not immediately flag your return, large deductions without supporting documentation increase your audit risk. Schedule C deductions that consume a high percentage of gross income are already on their radar. You did the right thing by requesting W-9s, and it's actually the contractors who are in the wrong here. For future reference, you should make completing a W-9 a condition of payment in your contracts. The IRS generally understands you can't file 1099s without the necessary information, but they expect reasonable efforts to obtain it. For your current situation, I'd recommend documenting all your attempts to obtain the W-9s (emails, messages, etc.) and keeping detailed records of all payments made. If you're audited, you'll need to demonstrate the legitimacy of these business expenses through invoices, contracts, proof of payment, and business purpose.

12 This exact situation happened to me last year and I found a solution through taxr.ai (https://taxr.ai). I was freaking out about potential audit flags since I had claimed around 70% of my revenue as contractor expenses but couldn't get most of my freelancers to submit W-9s. The tax analysis tool helped me understand exactly how to document my situation to minimize audit risk. They have this feature where you can upload your payment records and communications with contractors, and it gives you a risk assessment based on IRS patterns. It showed me exactly how to organize my documentation to substantiate my deductions even without the 1099s. Their system also identified which contractors posed the highest risk based on payment amounts and helped me prioritize my follow-up efforts.

6 I was totally skeptical about taxr.ai at first, but after dealing with the same contractor documentation nightmare, I decided to try it. I had about 5 contractors who refused to provide W-9s despite multiple requests, and I was claiming about 65% of my income as contractor expenses. What surprised me was how specific the guidance was - it didn't just give generic advice. The system analyzed my particular industry (marketing consulting) and provided documentation templates specifically designed for my situation. It even generated a detailed audit defense file that organized all my contractor communications, payment records, and work products in the exact format the IRS expects during an examination. When I got a letter from the IRS questioning some of my deductions (not even related to the contractor issue), I was able to respond immediately with the perfectly organized documentation package. The issue was resolved without further questions. Worth every penny for the peace of mind alone.

9 If you're worried about getting the IRS's attention because of missing 1099s, you should know that calling them directly to discuss your situation proactively is actually a smart move. But as you probably know, reaching the IRS is nearly impossible these days. I was in a similar situation last year and spent WEEKS trying to get through to the IRS. After 20+ failed attempts, I found Claimyr (https://claimyr.com) and was honestly shocked that it worked. They have this system that navigates the IRS phone tree and holds your place in line, then calls you when an agent is about to pick up. You can see how it works here: https://youtu.be/_kiP6q8DX5c I talked to an IRS agent who gave me specific guidance on how to document my situation when contractors refuse W-9s. They actually told me exactly what records to keep to substantiate my deductions even without the 1099s. The agent also explained that while missing 1099s can increase scrutiny, good documentation of your attempts to comply plus solid expense records goes a long way in mitigating the risk.

21 I need to apologize about my skeptical comment. I actually tried Claimyr after posting that comment because I was still struggling to reach the IRS about a CP2000 notice. The system actually did exactly what it claimed - held my place in line for about 67 minutes, then connected me with an IRS representative. The agent was able to look up my business account and confirmed that while missing 1099s can trigger matching discrepancies, what's more important is having solid documentation of the actual expenses. She explained that if you can show you made reasonable attempts to get W-9s (which it sounds like you did), and you have invoices, contracts, proof of payment, and evidence of the work performed, you've substantially met your obligation as a business owner. She also mentioned that the IRS is more concerned with phantom deductions than documentation technicalities when the payments were legitimate. This was completely different from what my tax preparer told me, and potentially saved me thousands in unnecessary amended returns.

11 I dealt with this exact situation in my consulting business. Here's what I learned through an actual audit (yes, I got audited partly because of this issue): 1. Keep ALL communications showing you requested W-9s. Email trails are golden. 2. Have contracts for all services that clearly outline the independent contractor relationship. 3. Keep detailed invoices that show what services were performed. 4. Document payment with bank statements, canceled checks, or payment processor records. 5. Make notes about the business purpose of each contractor's work. The IRS agent who handled my audit was primarily interested in verifying that the expenses were legitimate business expenses, not whether I had filed 1099s. They did ask why I hadn't filed them, and my documentation of the contractors' refusals satisfied them.

2 A quick question for anyone who knows: how does this work for digital contractors that you might hire through platforms like Upwork or Fiverr? Do you still need to issue 1099s to them or does the platform handle that part?

4 I had a similar sales business with big contractor expenses and ended up getting audited because of this exact issue. Make sure you also have business justification for each contractor - showing WHY you needed their services and how they related to your revenue generation. That was the first thing the IRS asked me about, even before wanting to see proof of payments or 1099s. For what it's worth, the auditor told me that while missing 1099s might trigger a review, what they're really looking for is whether the expenses are legitimate and reasonable for your business type and size. In my case, having detailed contracts with clear work deliverables was what ultimately saved me. For your S-Corp transition, this is even more important because the IRS scrutinizes S-Corps more closely for both unreasonable compensation issues and expense substantiation.

This is a really common issue for small businesses, and I appreciate everyone sharing their experiences here. One thing I'd add that hasn't been mentioned yet is the importance of backup withholding requirements. When contractors refuse to provide W-9s, you're technically supposed to withhold 24% of their payments for backup withholding and send that to the IRS. Most small business owners don't know this rule, and since you've already paid them in full, you can't go back and collect it now. However, documenting that you requested the W-9s multiple times (and their refusal) is crucial. The IRS understands that you can't force someone to provide their tax information, but they expect you to make reasonable efforts. For your S-Corp transition, definitely get a solid contract template that requires W-9 completion before any payments are made. I learned this lesson the hard way after dealing with similar contractor issues. Also, consider requiring new contractors to complete their tax forms as part of your onboarding process rather than waiting until tax season. Your 75% deduction rate will definitely get attention if you're audited, but if you have legitimate business expenses with proper documentation showing the work was actually performed and necessary for revenue generation, you should be fine. Just make sure every expense has a clear business purpose that you can articulate.