TaxBandits Knowledge Base

What does ‘Possible Audit Issue’ mean on a 1099/W-2 form?

When data on your 1099/W-2 form does not align with IRS guidelines, it may trigger a potential audit concern. TaxBandits flags these issues to alert you of discrepancies that might require supporting documentation. If you believe the information is accurate, you can proceed with filing, but it’s important to understand the potential consequences and documentation required.
 

What happens if I ignore this error and proceed with the reported data?

• The IRS, SSA, or other government agencies may request supporting documents for the data you report. 
• In some cases, the IRS may accept the return with errors, showing a status of ‘Accepted with Errors.’ If this happens, you will need to file a correction for the form.
• If the return is rejected due to these errors, you must fix them and retransmit the form.
   

Possible audit issues for W-2 Forms:

• Federal Tax Withholding is Unusual

If the federal tax withheld exceeds the appropriate rate for the employee’s tax bracket and W-4 details, or if it’s unusually high, it may indicate an error in payroll calculations.

Required Documentation:

• Accepted Form 941 for the business.
• Paystub for the employee (Optional).
• Proof of withholding amount deposited to the IRS or state agencies.
   

• State Tax Withholding Exceeds 8-10% 

Many states impose specific withholding requirements for non-resident payees or other scenarios. Typically, the maximum state tax withholding limit ranges between 8 - 10% (varies from state to state). State tax withholding exceeding 8-10% could indicate a miscalculation or failure to comply with state regulations.

Required Documentation:

• Proof of withholding amount deposited to the state agencies.
• Accepted Form 941 for the business (if applicable).
   

Possible audit issues for 1099 Forms:

• Federal Tax Withholding Above 24%

If federal tax withholding exceeds 24%, it may signal an error in calculations or an incorrect application of backup withholding rules.

Required Documentation:

• Proof of withholding amount deposited to the IRS or state agencies.
• Proof of business registration (if applicable).
   

• State Tax Withholding Exceeds 8-10% 

Many states impose specific withholding requirements for non-resident payees or other scenarios. Typically, the maximum state tax withholding limit ranges between 8 - 10% (varies from state to state). State tax withholding exceeding 8-10% could indicate a miscalculation or failure to comply with state regulations.

Required Documentation:

• Proof of withholding amount deposited to the state agencies.
• Accepted Form 941 for the business (if applicable).

How does TaxBandits indicate possible audit issues?

If TaxBandits identifies any data reported on your 1099 or W-2 forms as potential triggers for audit issues, it will flag them, as shown in the image below.

You will have the option to:

• Update the data to resolve the issue before proceeding or
• Ignore the error and continue with the filing if the flagged information is correct.