I know a 1099 is needed for anyone paid over $600, but what if, for argument sake, one cannot 1099 the contractor because they refuse or don't have a SS#, etc. What are the penalties for this beside not being able to expense the transaction? What does the IRS do?

You were required to get W-9 from the contractor before making the first payment.

In most cases it is $50 for each 1099 not filed. I believe the Service can also fine you an additional $50 if you do not have the Soc. Sec. No. In that case it would be $100 for each 1099 not filed. However, a flagrant violation could result in additional penalties. And by not having the W-9 with the Soc. Sec. No. the IRS may argue the you should have withheld taxes on the payments (backup withholding) and now they want their money.

You should have requested the information necessary to complete the 1099, when you hired the person to do the workand not after-the-fact. If you were audited, I think the penality is not very severe for non-reporting a 1099. It could be under $100 per occurrence.