American retirees may be done with their working careers, but they may still face the scrutiny of an IRS audit if their tax return raises red flags.
Data from the IRS shows the tax collection and enforcement agency has conducted audits on fewer than 1% of individual tax returns in recent years.
In the tax years from 2014 through 2022, the IRS reported that it examined 0.4% of all individual tax returns filed – though that figure rises to 7.9% of taxpayers who filed returns with income of $10 million or more.
Retirees generally have simpler tax returns that may not involve the kinds of tax credits that may warrant additional scrutiny, and while it’s unclear from the agency’s data how often the IRS audits retired Americans, there are some things that can attract the attention of auditors.
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High-income taxpayers are more likely to face IRS audits, so while retirees may not be earning income from work, they may face an audit if they have relatively high income from investments and capital gains or from retirement plan distributions.
The IRS in recent years has signaled that it won’t raise audit rates on taxpayers earning under $400,000 while it aims to focus enforcement on higher-income taxpayers.
Retirees who neglect to report all of their taxable income may also face IRS scrutiny. It’s important for taxpayers to submit copies of all tax documents they receive, including 1099s that may cover retirement income, interest income and Social Security benefits as well as a W-2 for any work they did as an employee.
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A report by Kiplinger notes that retirees who gamble must also report their winnings and losses, though the process is different for recreational and professional gamblers. Failing to disclose those, or only attempting to write off losses while not reporting winnings, can prompt additional scrutiny.
Taxpayers who are receiving income from retirement plans like traditional IRAs and 401(k) plans should be aware of the need to receive and report any required minimum distributions (RMDs) for those plans.
Currently, retirees face RMDs when they turn 73 and failing to take those withdrawals can trigger a penalty in the form of a 25% excise tax on the amount that wasn’t distributed as required.
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Retirees who are still working part-time or own a business need to ensure they’re accurately reporting that income or any deductions they’re claiming, as those could prompt the scrutiny of the IRS. Those who claim business loss deductions for a small business or side gig could have the IRS deem the activity a “hobby” and disallow those deductions.
Reporting large charitable contributions can also trigger a review by the IRS, particularly if the taxpayer’s reported donations represent a large portion of their income or include relatively valuable non-cash gifts to a charitable organization.
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The IRS has also placed an emphasis on international tax compliance, so taxpayers who have foreign bank accounts or income from overseas should ensure they report those on their tax return to avoid a higher risk of an audit or penalties.
