Financial Wellness

IRS Audit Preparedness for Healthcare Contractors

Rachel Szeklinski, CPA
March 5, 2024
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Hitting submit on your tax return is always a great feeling. The days of compiling information and the hours of stress not knowing if you owe money are put behind you, at least for another year. That is until you receive an IRS notice, requesting more information about your filed return or assessing you additional tax.

When you take travel contracts, depending on the agency, you may be a W2 employee or a 1099 contractor. W2 earners are considered to be the traditional profile of an employee, whereas a 1099 contractor is just that - an individual who is self-employed.  In this case the IRS views your employment as a small business. 

Not to mention that IRS stipend rules for travel nurses and allied pros can quickly become complex, raising additional IRS red flags. 

The good news is that there are steps you can take to prepare yourself in the event of an IRS audit. In this article, we’ll explore the basics of audit preparedness, including what you need to do to back your tax return filings and increase your success in winning an IRS audit.

What is Audit Preparedness?

Audit preparedness for healthcare contractors involves organizing the documents and information used to prepare your tax returns. This might include travel receipts, information surrounding your contracts, and proof of your tax home base.

Any document or statement that you used to come up with your tax return numbers should be kept for at least three years, which is the amount of time the IRS can go back and audit your return. When your return is selected for an audit, you have all of the information at your disposal to swiftly handle the requests.

Do Travel Nurses and Allied Health Professionals Get Audited by the IRS?

Yes, travel nurses and allied health professionals get audited by the IRS. While most agencies employ their travel clinicians as W-2 employees, if you were a 1099 worker, you could be more likely to be audited. This is because your return contains a lot of ambiguity. Unlike a W-2 that is filed by an employer, healthcare workers that are 1099 employees have expenses that the IRS can’t easily verify, like travel expenses.

When you are reporting expenses to offset travel income, the IRS wants to be sure you aren’t underreporting income by claiming fictitious expenses. As a result, they might issue a letter requesting documentation for your deductions.

With the rise in technology, traveling healthcare pro audits are becoming more common. The IRS knows a lot about your financial situation, such as the number of dependents you claim and where tax forms are being issued from. Any tax items out of the ordinary can automatically trigger your tax return for a review, especially if you are claiming a large loss.

Understanding IRS Red Flags for Healthcare Contractors

IRS red flags can be raised on any return, but it’s more common for travel nurses and allied health pros who have additional deductions outside of stipends. Here are some IRS red flags to watch out for:

  • Large Losses – Any time you take a significant loss on your tax return, you put yourself in a higher risk position. Capital losses occur when you sell an investment  for less than you paid for it. This applies to things like stocks, bonds, mutual funds, cryptocurrency and real estate.  This amount can be deductible on your tax return.  There are a few rules to know when reporting a capital loss, so just be sure to check in with your tax pro.  
  • Duplicating Non-Taxable Stipend Deductions – IRS guidelines for travel nurses and allied health professionals require that you don’t double-dip by deducting stipends and the expenses the stipends covered.
  • Deductions That are Out of Line with the Current Tax year– Expenses are only deductible when cash leaves your account, even if they relate to the next year. Let’s say that you pay for your license renewal at the end of the year. Although the renewal relates to the next year, it would be deducted in the current year because cash left your account prior to the year end. 
  • Breaking the 12 24 Rule – IRS guidelines for travel nurses and allied health professionals state that you can’t stay in the same location for 12 months in a rolling 24-month period. This can change your tax home. Eligible months don’t need to be consecutive. If you worked 7 months over the course of one year and 6 months in the next year in the same location, you are still breaking the 12-24 rule.  This is something to consider when extending your contract.  

These are the specific audit risks and triggers that healthcare contractors need to be aware of.

Key Tax Documentation Practices for Healthcare Professionals

To minimize the risk of receiving an unexpected audit request, you should keep detailed documentation for each filed return. This includes all tax forms used to file the return and receipts for additional travel deductions claimed. If you work with a tax preparer, be sure you request your documents back.

When it comes to organizing and maintaining financial records, be consistent. Don’t store half of your documents online and half in a file folder in your office. Be sure all of your documentation is in one central location, giving you the ability to easily provide supporting information to the IRS in the case of an audit.

Proactive Strategies for Audit Readiness

Even if you are confident in the deductions you claim and have adequate supporting documentation, you can still get audited. In many cases, the IRS wants to double-check that you are following all of the IRS stipend rules for travel nurses and allied health professionals by requesting more information.

The best time to take action is before an audit occurs. Make sure you have all of your documentation compiled and in a safe location. If you are the subject of an audit, enlist the help of a professional to help you navigate the process. Once your audit is complete, adjust your processes going forward.

Healthcare contractors who have already been the subject of a healthcare audit are automatically put on the IRS watch list. You want to be sure your returns don’t bring up IRS red flags going forward.

Wrapping Up Your Audit-Proof Plan

As you're navigating the world of healthcare contracting, remember that an IRS audit doesn't have to be a storm cloud over your sunny day. Understanding the ins and outs of audit preparedness is like having an umbrella just in case – it's about being smart, not scared.

Whether you're currently staring down an IRS request with wide eyes or just gearing up to be a tax-savvy traveler, knowing the ropes of audit preparedness is crucial. Our Travel Tax Guide for Travel Nurses and Allied Health Pros is your go-to resource for demystifying the complex world of healthcare contractor taxation.

Thinking of your next adventure? Sign up to travel with Trusted and embark on a journey that’s rewarding both professionally and personally.

Rachel Szeklinski, CPA

Rachel is a CPA with over 5 years of experience in public accounting. She has worked in all areas of accounting, from tax return preparation and bookkeeping to tax planning and payroll processing. She is also a freelance writer, helping small business owners and contractors generate content for websites, blog forums, and email campaigns. Rachel lives in Wisconsin, and when she's not writing or working in accounting, you can find her enjoying the outdoors, reading, maintaining her hobby farm, and spending time with family members and friends.

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