How to Reduce Your Risk of IRS Scrutiny in 2026

Most contractors never hear from the IRS. The ones who do are usually not answering for an aggressive tax position — they are answering for a number no document supports, or a form that did not match. Both are bookkeeping outcomes, not tax-strategy outcomes.

Two things changed for the 2026 tax year that alter how this works in practice, and most contractors have not adjusted their process for either. Start there, then build the habits.

What Actually Puts a Return in the Queue

Selection is largely mechanical. IRS Publication 556 describes a computer program, the Discriminant Inventory Function System (DIF), that "assigns a numeric score to each individual and some corporate tax returns after they have been processed." A high score means the return looks unlike its peers.

The second path is document matching. A return "may also be selected for examination on the basis of information received from third-party documentation, such as Forms 1099 and W-2, that does not match the information reported on your return." The third is market-segment study — the IRS examining how a whole class of similar taxpayers handles one issue.

Publication 556 is also explicit that selection "does not suggest that you made an error or are dishonest." That is worth internalizing, because it reframes the goal. The goal is not to be invisible. The goal is that every number on the return has a document behind it.

The 2026 Change Most Contractors Have Not Adjusted For

The One Big Beautiful Bill Act raised the information-return threshold. For payments made after December 31, 2025, Forms 1099-NEC and 1099-MISC are required at $2,000, not $600. The IRS Instructions for Forms 1099-MISC and 1099-NEC, revised December 2026, now direct you to file Form 1099-NEC "for each person in the course of your business during the year to whom you have paid at least $2,000." The threshold is indexed for inflation beginning with payments made in 2027.

Separately, the Form 1099-K threshold reverted to more than $20,000 and more than 200 transactions — retroactive to 2021, so the $600 version never took effect. See the IRS FAQ on the reverted threshold.

Both changes cut paperwork. Neither changes what is taxable, and each quietly creates new exposure:

• You will issue fewer 1099s. An $1,800 payment to a sub is still fully deductible and still needs the same support — you simply no longer have a form standing behind it. The W-9, the written scope, and the payment record now carry that weight alone.
• You will receive fewer 1099s and 1099-Ks. Income is taxable from the first dollar whether or not a form arrives. A return reporting less than the third-party documents show is the classic matching flag; reporting more than the forms show is not a problem.

Deadlines, and What Missing Them Actually Costs

• Form 1099-NEC — January 31, both to the IRS and to the recipient.
• Form 1099-MISC — recipient copy January 31; IRS copy February 28 on paper, March 31 filed electronically.

The part that surprises people: it is two penalties, not one. § 6721 covers the copy filed with the IRS and § 6722 covers the statement furnished to the payee, at identical rates. One late 1099-NEC costs $680, not $340. Fifteen late forms is $10,200 before anyone looks at a single deduction. Businesses averaging $5 million or less in gross receipts get lower annual caps — not lower per-form amounts.

Filing dates for the rest of the year are collected on our tax due dates page.

Worker Classification Is the Highest-Dollar Item on the List

Nothing else on a contractor's return carries the same downside. The IRS applies a common-law test across three categories:

1. Behavioral control — "Does the company control or have the right to control what the worker does and how the worker does his or her job?"
2. Financial control — how the worker is paid, whether expenses are reimbursed, who supplies the tools and materials.
3. Type of relationship — written contracts, benefits, whether the relationship continues, and whether the work is a key aspect of the business.

Florida contractors carry a second, faster-moving exposure on the same facts: workers' compensation coverage and stop-work orders. That side is covered in workers' comp and payroll tax pitfalls for contractors.

Six Habits That Do the Actual Work

1. Separate the accounts. A dedicated business bank account and card. Commingling is the single most common reason a legitimate deduction becomes an unsupportable one.
2. Book monthly, not in April. Rebuilding twelve months from memory in one sitting produces exactly the year-over-year swings that score badly and the miscodings that do not survive a second look.
3. Substantiate the large items as you go. Vehicle and home office fail most often, and both require records kept contemporaneously rather than assembled later — see vehicle and mileage deductions and the home office deduction in 2026.
4. Get the W-9 before the first check. A missing TIN triggers backup withholding obligations and makes a correct January filing impossible.
5. File information returns on time. See the arithmetic above.
6. Read the return before signing it. A large year-over-year move, a missing form, a ratio that is wrong for the trade — all far cheaper to explain now than to reconstruct in eighteen months.

Keep the Records Long Enough to Use Them

The IRS generally has 3 years from the filing date to assess additional tax (Publication 556). Retention follows from that:

• 3 years in the ordinary case.
• 6 years if you did not report income you should have and it is more than 25% of the gross income shown on the return.
• 7 years for a claim from worthless securities or a bad-debt deduction.
• Indefinitely if no return was filed, or a fraudulent return was filed.
• 4 years for employment tax records, running from the date the tax becomes due or is paid, whichever is later.

How KDM Accounting Services Can Help

We work with Florida contractors on the systems side, so the filings have something behind them:

• Set up or repair bookkeeping so records stay current through the year
• Organize substantiation for vehicle, home office, equipment, and subcontractor costs
• Review worker classification and information-return practice before January
• Collect W-9s and prepare 1099-NEC and 1099-MISC filings on time
• Prepare returns that reconcile to the documents the IRS already holds
• Flag issues while they are still cheap to fix

Build Habits, Not Anxiety

None of this is about being clever. Clean separation, current books, contemporaneous documentation, correct worker classification, and on-time filings remove most of what makes a return look unusual — and they turn any question that does arrive into a document request rather than a reconstruction project.

If you want a second set of eyes on how your records are organized before the January filing season, contact KDM Accounting Services. We will put practical processes in place and keep them running.