I really wish certain segments of this industry would stop being so irrationally paranoid about hiring. I think so many of our hiring and talent problems are self-inflicted.
The litmus test for a 1099 is that "an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."
Companies frequently fail this test when hiring people as 1099.
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employ...
If its an audit red flag, that's a risk even if you aren't breaking the tax rules associated with that transaction -- it increases the risk associated with any tax rules you might, knowingly or not, be breaking.
Further, if you are using it to vet potential permanent employees in working conditions as much like the ones they will be working in as employees as possible, its quite likely you aren't meeting your employment law obligations when you designate them as contractors (and, because tax treatment is tied to that designation, quite likely as a result not meeting your tax law obligations.)
Certainly, the best advice is a domain expert working for you in that capacity, that knows exactly what you are planning, rather than your payroll company speaking in generalities, but in generalities the advice given doesn't seem all that bad.
Direct contract-to-hire is also done, but its fairly frequently not done legally, which is why it gets additional scrutiny.
Crazily enough PayChex has told us that the real solution here is for us to "sign" the person over to a contracting company so we can hire them thru the contracting company for the evaluation period. Yes we'll pay more for them since we have to pay that company's markup but we won't get gone after by the IRS. And, yes, it adds another layer of BS / paperwork. End result? We've hired no one because of this - its too hard to vet engineers without seeing their work. Sigh.