A 65-year-old usually marks a major change in financial life. Retirement income replaced wages, social security began to be paid, and medical insurance became the main form of medical insurance. For many retirees, it is assumed that their tax returns will be easier. Unfortunately, reality is often the opposite, especially when it comes to IRS review.
Although “audience” may sound daunting, what the IRS calls “comments” can trigger for many reasons. These comments don’t always mean you’re doing something wrong, but they do mean that the IRS wants to take a closer look at certain details. For older taxpayers, if errors are found, this can lead to additional paperwork, delays in refunds, and even return taxes.
Here are nine common situations that can lead to IRS review after age 65, and what you can do to reduce risk.
9 triggers that can lead to IRS review after 65 years of age
1. Reporting the wrong amount of social security benefits
Social Security benefits may not be taxable, but they are not always tax-exempt. The IRS uses formulas based on your “consolidated income” (adjusted gross income + non-mobile interest + half of social security benefits) to determine whether a portion of the benefits should be taxed.
If you miscalculate or omit some of your welfare income, it may cause red flags. The IRS receives the SSA-1099 form directly from the Social Security Agency, so any mismatch between what you report and what is on that form will trigger a review. Many retirees reported unexpectedly because they forgot the benefits for the first or last months of the year, or they mistakenly reported the net amount after Medicare deductions instead of the net amount caused.
Prevention tips: Always use the numbers from the official SSA-1099 form and double-check the tax software entries. If you are not sure how much Social Security you are taxable, use an IRS worksheet or consult a tax preparer.
2. Forgot to report the minimum distribution (RMD) required
Once you reach a certain age (currently for most retirees), the IRS requires you to withdraw minimum amounts from traditional IRAs, 401(k)s and certain other retirement accounts each year. In most cases, these required minimum distributions (RMDs) should be fully taxable.
IRS has obtained a copy of Form 1099-R from your retirement plan administrator. If you fail to perform RMD or forget to report on your tax return, notice will almost certainly be triggered. Worse, the lack of RMD can lead to a sharp fine, which is 25% you should withdraw, although if corrected quickly, you can reduce it to 10%.
Prevention tips: Mark your calendar every year during the RMD deadline and make sure the full amount is reported in your tax return. If you realize you missed RMD, please contact your plan administrator immediately and submit Form 5329 to claim a waiver of the fine.
3. Large, unusual charitable deductions
Retirees often add charitable donations, especially if they no longer support children or pay mortgages. Despite its admirable generosity, claiming an unusually large amount of charitable deductions compared to your income may raise suspicion from the IRS.
For example, if you report $40,000 in income but ask for a $20,000 charitable deduction, the IRS may want to see proof. This is especially true if your donation amount suddenly soars compared to previous years. The IRS will expect receipts, bank statements, and assessments of larger donations.
Prevention tips: Keep a detailed record of every donation, especially non-cash items. If you donate an appreciative asset, consult a tax expert to make sure it reports are correct.
4. Sudden changes in revenue reports
Retirement usually means a transfer of income sources, but year-to-year changes can draw the attention of the IRS, especially if there is no clear reason to involve a sudden drop in taxable income. For example, taxable income from $100,000 to $25,000 a year may be legal, but may also indicate that income is not reported.
The IRS uses a computer system to compare your current returns to the past few years. Any huge difference may be carefully observed. This is especially true if your investment income seems to disappear without explanation.
Prevention tips: If your income changes dramatically due to retirement, asset sales, or other life events, please continue to support the documentation and consider including an explanatory statement in your return.
5. No reporting of investment or rental income
Many retirees continue to make money from investments, real estate or accompanying businesses. All of these income sources generate tax forms – dividends for 1099, interest levied in 1099-INT, stock sales 1099-B, rental income Schedule E. The IRS obtained copies of all these forms.
If you fail to include them in the return, a mismatch will trigger a notification or review. Even a small amount of unreported revenue can cause problems, especially if you deliberately forget it. For retirees who have multiple brokerage accounts or property managers, it is easy to miss the form if you don’t have an organization.
Prevention tips: Wait until you receive all 1099s before submitting and then cross-check with last year’s returns to make sure you’re not ignoring the revenue stream.
6. Require medical deduction without evidence
Senior taxpayers are more likely to have substantial medical expenses, while the IRS allows eligible expenses over 7.5% of adjusted total income. However, large medical deductions that are not well-proven can lead to scrutiny.
The IRS seeks too many or questionable claims, such as makeup procedures, unauthorized treatments, or unqualified costs. They also check that the amount you requested is consistent with the income you reported.
Prevention tips: Keep item-by-item receipts for all required medical expenses, doctor’s statements and insurance records. If you are unsure if the fee is eligible, check the IRS publication 502 before including it.
7. Frequent large-scale cash transactions
Although cash is not suspicious in nature, large or frequent cash deposits, withdrawals or purchases may attract the attention of the IRS, especially if it does not match your reported income. Financial institutions must report cash transactions over $10,000, and the pattern of restricted activity can also attract attention.
For retirees, this can happen if you sell personal belongings, receive a big gift or cash in on the investment. If the IRS is unable to match the source of funds to the income you report, they may initiate a review to ensure you do not omit taxable income.
Prevention tips: Record any sources of large cash and be prepared to explain them. If the funds are not taxable, proof must also be retained.
8. Early retirement account withdrawal
Unless you are eligible for an exception, make money from an IRA or 401(k) before age 59½. However, even if retirement age is not reported correctly, withdrawal can cause confusion. For example, converting a traditional IRA to a Roth IRA is taxable, and the IRS will expect to see it when you return.
Retirees sometimes assume that certain non-tax rates are exempt from taxes when they are not taxed, which can lead to insufficient reporting and IRS notifications. The IRS obtains a copy of Form 1099-R in each retirement account distribution, so the mismatch is marked soon.
Prevention tips: Please check the tax processing before you withdraw any plan withdrawal. If you are unsure, get advice from a tax professional to avoid accidental inadequate reporting.
9. No state or local taxable incidents reported
The IRS focuses on federal taxes, but state-level tax events such as selling property or winning lottery tickets may fluctuate upward. States often share information with the IRS, and censorship may be triggered if you have a mismatch between content reported at the state and federal level.
For retirees, this usually happens when you sell a vacation home, get a big pension expense or win a prize for a local competition. Even if your state tax laws differ from federal rules, the IRS still expects consistency in reporting taxable events.
Prevention tips: Make sure your federal and state returns tell the same financial story, even if some income is taxable only at one level.
Maintain review during retirement
Once you pass 65, the IRS doesn’t have to target you, but your tax returns will often become more complex, increasing the chances of review. Social Security, RMD, investment income and deductions can all create potential mismatches, even if there is no accurate report.
The best way to avoid trouble is to keep carefully documented, archive accurately and understand which transactions are taxable. While no one can guarantee that they will never be censored, you can greatly reduce opportunities by being organized and proactive.
If the IRS sends you a letter tomorrow asking for evidence of each deduction and revenue stream, can you make it without scrambling?
Read more:
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