The IRS uses a process called document matching to compare information reported on Form 1099 to the taxpayer’s individual income tax return. Here’s how the system works:
1. TIN-Based Matching
- Each Form 1099 includes the Taxpayer Identification Number (TIN) (usually a Social Security Number for individuals or an Employer Identification Number for businesses) of the recipient.
- The IRS’s automated system matches the TIN on the 1099 with its records to identify the taxpayer.
2. Information Returns Processing
- Businesses and payers submit 1099 forms to the IRS, often electronically.
- The forms are entered into the IRS database and linked to the associated taxpayer account based on the TIN.
3. Cross-Referencing with Tax Returns
- When the taxpayer files their tax return (e.g., Form 1040), the IRS compares the reported income against the 1099 information it received.
- Key matching points:
- Gross income reported on the tax return (e.g., from wages, nonemployee compensation, interest, or dividends).
- Specific schedules: Self-employment income on Schedule C, rental income on Schedule E, etc.
4. Automated Underreporter Program (AUR)
- If there’s a discrepancy—such as income reported on a 1099 but not on the taxpayer’s return—the IRS flags it for review under the Automated Underreporter (AUR) Program.
- The taxpayer may receive a notice (e.g., CP2000) detailing the mismatch and proposing additional taxes, penalties, or interest.
5. Common Errors That Trigger IRS Notices
- Failing to report income from a 1099.
- Incorrect or mismatched TINs.
- Reporting income under the wrong category or schedule.
- Overlooking non-cash payments (e.g., prizes or barter transactions).
6. State-Level Coordination
- In some cases, the IRS shares 1099 information with state tax agencies, enabling them to cross-check income reported on state tax returns.