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HelloCustomerand welcome to just answer.
This is not forbidden by the IRS, as long as the work done as a 1099 is justified as a self employed individual. Some companie actually employ the same person as both a 1099 and a W-2, and the work between the two jobs are different. The scope of the work must fall within the rules and regulations of a self employed individual, in order for the company to legally classify you under a 1099.
It is a possiblity that this may red flag her for an audit, but the reality is that this is justifiable and would be easily proved if she was called for an audit Even if this does bring in a red flag, it does not neccessarily mean she would be called in for an audit. In fact this type of audit may be one that is conducted by mail or phone, as it would only need to be proved on the scope of the business.
Since, she is considering become a Incorporating her business, then you are not even required to 1099 her corporation. The expenses and Income between the two of you would be proved in your billings between each other. Corporations are not required to 1099 other corporations.