Does the IRS does not track 1099s?
I suspect the IRS does not want to deal with “independent contractors” due to the extra paperwork.
The IRS tracks 1099s....they just enforce a couple years later. I received this huge 25 page wage garnishment letter for a golfer we paid for 1 day in 2005 a couple weeks ago.
The IRS does collect 1099s. That's why it is critical to get them distributed on a timely basis to the employees working on a 1099 basis.
The IRS doesn't care about the paperwork associated with 1099 contractors. They do care about sole source employers trying to evade tax responsibilities by claiming the employees are contractors rather that employees with a sole employer.
What they really don't want is people deducting expenses for producing income. An independent contractor can write all kinds of things off against the gross income from the activity, while an employee rarely gets to deduct anything.
Think of the W-2 as a ring in your nose, the IRS really, really wants it there. That way, your opportunity to cheat them is greatly reduced, in their eyes.