I am looking for an authoritative reference that the IRS can disallow a subcontractor expense deduction under an audit if the 1099 was not issued to the subcontractor – Let’s say that a 1099 would have been required – Does this exist or can anyone point me to where this might be?
I consulted with Alan Pinck, one of our speakers who is a federal audit specialist and he confirmed that the IRS cannot disallow the expense based solely on the lack of 1099 reporting. They can penalize the taxpayer for not issuing the 1099 I believe that is 520 for not providing it to the payee and another 520 for not sending it to the IRS. If the rep can show the invoice and POP and of course a business connection then the IRS should accept it. But if there is not enough evidence that the expense was for the business or not ordinary and necessary they can deny the deduction.