Are you worried about a tax audit? Avoid These IRS Red Flags

(NEXSTAR) – Have you ever had that sinking feeling when you see an unexpected letter from the Internal Revenue Service (IRS)? It can be hard not to, even if you have no reason to fear an audit.

To have peace of mind during tax season, it’s important to know how the IRS selects who to audit. It’s also important to make sure you’re not one of them.

“What people don’t understand is that there are no human beings involved in selecting which tax return to audit,” said David Klasing, CPA and tax attorney. “It’s all done by computers using statistical analysis software, and there’s an expression in the profession – pigs get fat, pigs get slaughtered.”

Klasing says every tax return gets a numerical score, with the worst being 999, then 998, 997 and so on. Government audits will usually start with the 999s and progress from there.

Here are some of the red flags to avoid when doing your taxes this year:

Round numbers

When the IRS sees crisp, round numbers all over a tax return, that’s a red flag.

“If you own a business and you put a whole bunch of round numbers on a tax return, I’m talking about everything… ends in zero,” Klasing said, “the IRS computer will look at that and say that One of two things happens: Either someone pulls numbers out of their rear end and slams them on the back and they’re not real, or someone uses estimates.

He added that estimates may be appropriate in some situations, but estimates must be reasonable and must be disclosed.

Work at home

The COVID-19 pandemic has forced many people to work from home, but taxpayers should be careful when detailing.

“I would say the home office deduction is the one that drives a lot of audits,” Klasing said. “If your employer gives you an office away from home to work in, you can’t deduct the home office either.”

You can only claim this deduction in very specific situations, such as if you are self-employed or working as an independent contractor. In fact, the IRS says anyone who receives a W-2 (and does not generate income from a side business, gig work, or some other form of self-employment) is not eligible. to a home office deduction, even if she works. from home during the pandemic.

If you do qualify, Klasing said you need to make sure the office is dedicated to work, with nothing of a personal nature — no TVs, no video games, no gaming computers. going into that space, that’s the job,” Klasing said.

repeat offenders

As for the red flags the IRS looks for, becoming a habitual offender can be dangerous.

Without ramifications, a tax evader could continue to employ the same tactic and “by the time he gets caught, he’s so far off course: ‘It’s negligent behavior and he didn’t understand the law’ in relation to “this situation”. is willful tax evasion and they should go to jail,” Klasing said.

Creating a pattern of tax crime only makes the government’s job easier by excluding the possibility of an honest mistake.

Health insurance

Thinking of deducting your health insurance expenses? Be sure to follow IRS advice on this one.

You may be able to deduct expenses you paid during the year for medical and dental care for yourself, your spouse, and dependents, but be sure to only deduct the amount of your total medical expenses that exceed 7.5% of your adjusted gross income.

See the following qualifying expenses on the IRS website.

charity donation

Thinking of claiming a charitable donation on your next tax return? If it was over $250, make sure you have written acknowledgment from the charity.

The IRS is also looking for people claiming to have made large and unlikely donations.

“I see people crossing the line with that one all the time,” Klasing said. “If you make $30,000 a year but still give $20,000 a year to your church, they’re not going to buy it.

Offshore accounts

Keeping money in an offshore account isn’t illegal, but that doesn’t mean you don’t have to pay taxes on it.

“There’s this whole required foreign information report,” Klasing said. “An offshore account with over 10,000,000… [you need] an FBAR” – a report on foreign bank and financial accounts – “for bank account reports”.

Even if you generated no taxable income, the IRS requires those with offshore accounts of $10,000 or more – at any time during the tax year – to file an FBAR.

“They will seek you out for criminal charges for reporting foreign information and may check criminal charges for failing to collect foreign income overseas.”

He added that he had seen the government, in some cases, impose 100% penalties on offshore accounts.

How can you protect yourself?

“What I tell all my clients is to prepare every statement as if it was going to be audited,” Klasing said, “and you shouldn’t be afraid of an audit. audited, what type of tax return would you prepare?