Having a sinking feeling when you receive an unexpected letter from the Internal Revenue Service (IRS) is a common experience. Even if you have no reason to be concerned about an audit, it might be difficult to refrain from doing so.
It’s critical to understand how the Internal Revenue Service picks people for audits if you want to have peace of mind during tax season. It’s also crucial to be certain that you aren’t one of such individuals.
According to David Klasing, a certified public accountant and tax attorney, “What people don’t realize is that there are no human beings involved in the selection of a tax return for audit.” According to the expert, “all of that is done by computers using statistical analysis software, and there’s a term in the profession that goes: Pigs get fat, hogs get butchered.”
According to Klasing, every tax return is assigned a numerical score, with the worst being 999, followed by 998, 997, and so on. Audits conducted by the government will normally begin with the 999s and work their way down from there.
Some of the warning signs to look out for when filing your taxes this year include the following.
Numbers should be rounded.
When the Internal Revenue Service (IRS) notices nice, round numbers all over a tax return, it raises suspicion.
“If you own a business and you put a whole bunch of round numbers on a tax return, I’m talking everything… ends in zero,” Klasing explained, “the IRS computer will look at that and say one of two things:
either somebody is pulling numbers out of their rear end and slapping it down on the return, and they’re not real, or somebody is using estimates,” Klasing said the IRS computer will look at the round numbers and determine which is the case.
His conclusion was that estimates can be suitable in certain cases, but that they must be reasonable and must be made available to the public.
Working from home is becoming increasingly popular.
Many people have been forced to work from home due to the COVID-19 outbreak, however, taxpayers must use caution when itemizing their deductions.
Among the deductions, “I would say the Home Office deduction is one that leads to a significant number of audits,” Klasing said. “If your employer provides you with an office outside of your house to work in, you are not eligible to deduct the cost of your home office.”
It’s important to note that you can only claim this deduction in very particular circumstances, such as if you are self-employed or operate as an independent contractor.
Anyone who receives a W-2 and does not produce revenue through a side business, gig labor, or some other kind of self-employment is not entitled to a Home Office deduction, according to the IRS, even if they are working from home while the epidemic is ongoing.
If you do meet the requirements, Klasing advises that you ensure that your workplace is only for professional purposes, with nothing of a personal character present — no televisions, no video games, and no gaming PCs, for example. According to Klasing, “the only activity that takes place in that space is work.”
Those who have committed the same offense more than once
As far as the red signs that the Internal Revenue Service is searching for, becoming an unrepentant tax evader can be extremely perilous.
An individual who does not face consequences may continue to engage in tax evasion tactics, and by the time they are apprehended, “they are so far away from the line of ‘this is negligent behavior, and they didn’t understand the law,’ versus “this is willful income tax evasion, and they should go to jail,” Klasing explained.
Health Insurance is a must-have.
Are you considering deducting your health insurance premiums? Make certain you follow the IRS’s instructions on this one.
Depending on your circumstances, you may be able to deduct expenses you paid for medical and dental care for yourself, your spouse, and your dependents during the year. However, keep in mind that you can only deduct a portion of your total medical expenses that exceed 7.5 percent of your adjusted gross income.
On the IRS website, you can get information about the following expenses that are allowable.
Donations to charitable organizations
Are you considering deducting a charitable contribution from your next tax return? If your donation totaled more than $250, make sure you receive a signed acknowledgment from the organization.
The Internal Revenue Service is likewise on the watch for those who claim to have donated large, improbable sums of money.
“I see folks crossing the line with that one on a regular basis,” Klasing said of the incident. “If you’re making $30,000 a year but only giving $20,000 a year to your church, they’re not going to buy it,” says the author of the book.
Offshore accounts are those held in a foreign country.
Although keeping money in an offshore account is not against the law, it does not exclude you from paying taxes on that money.
In addition, Klasing explained that “there is all this obligatory foreign information reporting.” “If you have an offshore account with more than $10,000 in it, you must file an FBAR” — a Report of Foreign Bank and Financial Accounts — “in order to report bank accounts.”
Even if you did not have any taxable income, the IRS requires anybody who has an offshore account with a balance of $10,000 or more at any point during the tax year to file an FBAR with the IRS.
It is possible that you could be charged with criminal offenses for failure to declare foreign information, and that you will be charged with criminal offenses for not disclosing offshore foreign revenue.
He went on to say that he has witnessed the government slap 100 percent penalties on offshore accounts in rare instances.
What measures can you take to safeguard yourself?
For the most part, Klasing advises his clients to “prepare every return as if it’s going to be audited,” adding that they should “have no fear of being audited.” In the event of an audit, what form of tax return would you file if you knew it was going to happen?”