Avoid These IRS Red Flags If You Are Worried About a Tax Audit

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Recently, WGN News in Chicago published an article about the most common signs that the IRS looks for when they are considering instituting an audit against a taxpaying individual or business. The author came directly to David W. Klasing to discuss, in his view, what issues he observes most frequently.

Some of the red flags that came up in the article include round numbers on returns, home office and health insurance deductions, unreported overseas assets, and deductions for large charitable donations. Taxpayers should also be wary of the government’s recent increased scrutiny towards potential abusers of pandemic-related relief efforts.

For first-hand analysis from a Dual Licensed Tax Attorney and CPA on how red flags in your tax disclosure past could make you the target of a costly and invasive government audit, contact the Tax Law Offices of David W. Klasing today at our offices at (800) 681-1295.

Round Numbers

One of the most obvious indicators of tax noncompliance for the IRS is a tax return that features figures ending in zero or round numbers. Even IRS computer analysis programs can identify where disclosures seem like they were just made up by the taxpayer or are merely estimates rather than actual accurate figures.

While estimating can be reasonable and justified in some situations, the taxpayer should always disclose the nature of and reasons for the estimations so that it doesn’t look like they are just throwing numbers on a form. Even though you might be comfortable with your estimations, the IRS likely won’t be. Unfortunately, the most effective way for them to double check your work is to institute a formal income tax audit.

Working from Home

Since the COVID-19 pandemic has caused a mass migration of workspaces from the traditional office to the home, the line for acceptable work deductions has blurred substantially. Many taxpayers erroneously believe that, since they are working remotely, they can claim deductions for expenses stemming from outfitting their residence for work.

The reality is that anyone who receives a W-2 as a traditional employee is most likely not eligible for the home office deduction, regardless of whether the transition occurred as a consequence of measures intended to deal with the COVID-19 pandemic. Only independent contractors may claim home office deductions, and even in these situations, the deductions can only be claimed if the home office is strictly dedicated to work. If you attempt to claim that your laptop and a note pad make your kitchen a home office, the IRS will have questions. One of the requirements to deduct a home office is that your employer does not provide you an office (place to work) outside the home. It is unclear at present if the covid lockdowns mitigated this requirement where you were unable to work outside the home.

Repeat Offenders

One instance of tax noncompliance is easy to write off as a mistake. A string of similar errors based in the same tax return line items is harder to explain. The IRS may view multiple instances of noncompliance as evidence of willful tax evasion. This is more than enough for the government’s tax watchdog to institute a formal audit or exponentially worse in egregious cases, a criminal tax investigation.

Health Insurance

The cost of healthcare is skyrocketing across the country. To give the taxpayers some relief, the government does allow a certain amount of deductions. However, these deductions are only available for certain eligible expenses, and only if the total eligible expenses exceed 7.5% of your adjusted gross income. To be an eligible expense, only amounts that were not reimbursed by your health insurance are deductible. The Dual Licensed Tax Lawyers and CPAs at the Tax Law Offices of David W. Klasing can help walk you through how to take appropriate deductions on your medical bills without invoking the ire of the federal government.

Charitable Giving

Even in the most noble of efforts, the IRS is bound to scrutinize the taxpayer whenever they suspect that something in their tax returns does not add up. For instance, a taxpayer who takes deductions for a donation that is particularly large in comparison to their annual income will create red flags. That is why you should always secure written acknowledgement of your donation from the recipient charity if you donate more than $250 to the same place.

Offshore Accounts

If you are a U.S. taxpayer and have more than $10,000 in assets held in offshore financial accounts, you owe the IRS a Report of Foreign Bank and Financial Accounts, otherwise known as an FBAR. The FBAR is an information return, rather than a traditional income return, meaning that you must file an FBAR even if you do not generate income on the overseas assets.

Penalties for any FBAR reporting violation – including filing too late or making filings with errors – can result in substantial penalties that can be based on the total value of the assets held offshore if your non-disclosure is deemed to be willful, so it is imperative that you identify when you fit the FBAR filing requirements and use a Dual Licensed Tax Attorney and CPA to help you file correctly and on time.

COVID-19 Relief Benefits

In the time since March of 2020 when the COVID-19 pandemic first took hold in the United States, the federal government has enacted several measures to provide relief for individuals and small businesses struggling with the difficulties that the pandemic has caused. However, many chose to abuse these programs for their own personal benefit.

The government has gotten wind of the many fraudulent schemes involving their relief efforts and are now starting to investigate civilly and criminally. The IRS has already filed criminal charges against over 1,000 alleged abusers and seized back over $1 billion in proceeds from government relief programs. But the recent naming of Kevin Chambers as a special prosecutor to track down fraudulent abuses of COVID-19 relief programs shows that the federal government is far from finished in this area.

Our Dual Licensed Tax Lawyers and CPAs Can Help You Avoid IRS Audits and Criminal Tax Investigations.

If your past or current tax returns feature any of the red flags discussed above, or you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution. The time is now to act. Reach out to one of the dedicated Dual Licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing. We can be reached at our offices when you call (800) 681-1295 today.

Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.

It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!