IRS Audit Red Flags That Retirees Should Look Out For.

In retirement, it’s critical to make use of these suggestions.

You might assume your chances of being investigated by the IRS are low as you relax in retirement, hosting dinner parties for friends and family and taking more vacations than you ever had to work. After all, it’s clear why the IRS would bother reviewing your tax returns once you’re in your golden years.

And in most cases, you’d be correct. Less than one percent of individual tax returns have been randomly selected for audit by the IRS in recent years, with the vast majority of audits being conducted through the mail. Retirees likely have a lower likelihood of audit since they claim fewer recoverable credits than other taxpayers, and their returns are often simple. Yet, not every retiree needs to worry about an Internal Revenue Service audit.

The Inflation Reduction Act of 2015 provides the IRS with an additional $80 billion over ten years, the vast majority of which must be spent on enforcement. It will take time for auditing to pick up speed, and the IRS will need some time to recruit competent examiners and train them to audit in-depth tax returns. Most taxpayers won’t notice the IRS’s newfound enforcement power (brought about by its $80 billion windfall) for quite some time. However, remember that the IRS is always a year or more behind in scrutinizing tax returns. By the time the IRS begins randomly picking returns for audit in 2024, it may have more power to enforce the law than it has now.

Retirement increases the likelihood of an audit or other IRS contact for several reasons, including the intricacy of your return, the types and quantities of deductions or other tax benefits you claim, and whether or not you are still actively involved in the business. The likelihood of an audit increasing due to other acts or behaviors is also possible. You can’t know if you’ll be audited in retirement, but it’s always possible.

Yet, these three audit warning flags increase the likelihood that the IRS would pay unwelcome attention to your return.

Achieving Substantial Financial Success

While the possibilities of being audited as an individual are meager, they rise dramatically when your income does. This is especially true if you sell a significant asset or receive a large retirement settlement. The IRS will receive an additional $80 billion over ten years, with $45.6 billion going toward audits and other enforcement efforts and collection tactics.

The Treasury Department and the IRS have stated that some enforcement money will be used to increase audits of high-net-worth people and pass-through businesses like LLCs, S corporations, and limited partnerships. Officials from the Treasury Department have made a bold promise: no more audits for anybody with incomes below $400,000. Whether or not the IRS can meet this promise remains to be seen.

The Internal Revenue Service (IRS) has come under fire for focusing too much attention on low-income taxpayers who claim refundable tax credits like the earned income tax credit while neglecting high-income filers. The Internal Revenue Service (IRS) is cracking down harder on high-income earners partly because of this backlash and to help reduce the tax gap.

Everyone wants to be a millionaire, so it’s not that you shouldn’t aim to reduce your income in retirement. Remember that the likelihood of an IRS inquiry increases in proportion to the income reported on your tax return.

Not disclosing All Taxable Income.

Retirees might expect the IRS to investigate them if they fail to declare taxable income from salaries, dividends, pensions, IRA distributions, Social Security benefits, and other sources.

All 1099s and W-2s you get are reported to the IRS. The 1099-R, 1099-SSA, and 1099-K are all used to write various types of income to the IRS, reporting online payment sources such as PayPal, Airbnb, etc.

Computers at the IRS will verify your reported income against the figures on the forms. If there is a discrepancy, the IRS computers will generate a notice and mail it to you. Thus, whether or not you get a shape like 1099, you still need to declare all of your income.

The failure to take RMDs

The Internal Revenue Service wants to ensure that those with IRAs and people who participate in 401(k)s and other employer retirement plans are taking and reporting their RMDs as needed (RMDs).

The government organization is aware of some people who are 73 or older (75 or older starting in 2033, 72 or more aged for 2020-22, and 7012 or older for years before 2020) who have neglected to take their required minimum distribution (RMD) for the year. Those who don’t take enough risk being fined up to 25% of the difference (50% for years before 2023) if they’re caught.

Note that the SECURE 2.0 Act, which amended RMD regulations, became law at year’s end of 2024. Those still determining the timing of their RMDs should seek the advice of an expert.