A retired couple reviews tax documents at their kitchen table.
Retirees, your working days may be over, but the IRS could still take a closer look at your finances. While the IRS audits fewer than 1% of individual tax returns, certain red flags can increase your chances of an audit.
IRS data shows that from 2014 to 2022, the agency examined just 0.4% of individual tax returns. However, this jumps to 7.9% for those reporting income of $10 million or more.
While retirees often have simpler tax returns, several factors can still attract the IRS’s attention:
High Income: High-income taxpayers are more likely to be audited. Even in retirement, substantial investment income, capital gains, or retirement plan distributions can trigger an audit.
Unreported Income: Failing to report all taxable income is a major red flag. Ensure you submit copies of all tax documents, including 1099s for retirement income, interest, Social Security benefits, and W-2s for any employment.
Gambling Winnings and Losses: Report all gambling winnings and losses. Kiplinger notes that discrepancies or failures to report can lead to increased scrutiny.
Required Minimum Distributions (RMDs): Be aware of RMDs from traditional IRAs and 401(k) plans. Currently, retirees must take RMDs by age 73, and failure to do so can result in a 25% excise tax on the undistributed amount.
Business Income: If you’re working part-time or own a business, accurately report all income and deductions. The IRS may scrutinize business loss deductions, especially if the activity is deemed a “hobby.”
Charitable Contributions: Large charitable contributions, particularly non-cash gifts, can also trigger a review.
Foreign Accounts: The IRS emphasizes international tax compliance. Report any foreign bank accounts or overseas income to avoid audits and penalties.
About the Author
