As you bask in your retirement years, traveling, enjoying dinners with your friends, spending time with family, finding new hobbies, and returning to old ones, you may think your chances of an IRS audit would be low. After all, why would the IRS examine tax returns that you file in your golden years? And generally, you would be right.
Over the past few years, the IRS has been auditing significantly less than 1% of all tax returns filed by individuals, and we expect this figure to decline even further in the near future.
The audit rate is likely lower for retirees, who don’t claim as many refundable credits as other taxpayers and whose returns are generally not very complicated. However, not all retirees are in the clear in terms of IRS audits.
A retiree’s chances of being audited, or otherwise hearing from the IRS, can escalate depending on various factors, including the complexity of your return, the types and amounts of deductions or other tax breaks you claim, and whether you happen to still be engaged in a business.
Other actions or activities can boost the odds of an audit, too. In the end, there’s no way to predict whether you will be audited in your retirement years. But these 11 audit red flags could increase the chances that the IRS will give your return unwelcome attention.
1. Failing to report all taxable income
Failing to report taxable income from wages, dividends, pensions, IRA distributions, Social Security benefits, and other sources will almost certainly draw unwanted attention for retirees from the IRS.
The IRS gets copies of all the 1099s and W-2s you receive. This includes the 1099-R (reporting payouts from retirement plans, such as pensions, 401(k)s and IRAs), SSA-1099 (reporting Social Security benefits), and 1099-K (reporting online payment sources such as PayPal, Airbnb, Etsy, etc.).
The IRS' computers cross-check the numbers on the 1099 and W-2 forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a notice that the IRS will send to you.
So, be sure to report all income, whether you receive a form such as a 1099 or not. For example, if you get paid for walking dogs, tutoring, driving for Uber or Lyft, giving piano lessons, or selling crafts through Etsy, the money you receive is taxable.
2. Making a lot of money
While the overall individual audit rates are extremely low, the odds increase significantly as your income goes up, as it might if you sell a valuable piece of property or get a big payout from a retirement plan.
- According to IRS audit statistics, about 0.4% of total individual returns get audited by the IRS.
- This number jumps to 1% for filers who report total positive incomes between $1 million and $5 million, 2.3% for filers reporting total positive incomes between $5 million and $10 million, and about 8% for filers who report total positive income of $10 million or more.
It's not that you shouldn't try to make less money in your retirement. Everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you will be hearing from the IRS
3. Claiming large deductions or losses
If the deductions or losses on your return are disproportionately large compared with your income, the IRS may pull your return for review.
- A large medical expense could send up a red flag, for example.
- Taking a big loss from the sale of rental property or other investments can also spike IRS curiosity, especially if the loss offsets income from wages, pensions, or other sources.
- Also on the IRS’s radar are deductions taken for bad debt and worthless securities, especially if you report the amount as an ordinary loss.
But if you have the proper documentation for your deduction, loss, or credit, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you owe.
4. Gambling winnings and losses
Retirees generally have more time to spend on entertainment activities. Maybe you enjoy going to the casinos and gambling. Or perhaps you started betting more on sporting events now that sports betting is legal in most states. Whether you're playing the slots, gambling on sporting events, trying your luck at a lottery jackpot, or betting on the horses, one sure thing you can count on is that Uncle Sam wants his cut.
Recreational gamblers must report gambling winnings as other income on the 1040 form. Professional gamblers show their winnings on Schedule C. Failure to report gambling winnings can draw IRS attention, especially because the casino or other venue likely reported the amounts on Form W-2G.
Claiming large gambling losses can also be risky. You can deduct these only to the extent that you report gambling winnings (and recreational gamblers must also itemize). Writing off gambling losses, but not reporting gambling income, is sure to invite scrutiny. Also, taxpayers who report large losses from their gambling-related activity on Schedule C get an extra look from IRS examiners, who want to make sure that these individuals really are gaming for a living.
Note that a new rule kicks in for 2026 returns that you would file in 2027. The ability to deduct gambling losses is further limited. Taxpayers with gambling losses can deduct only 90% of losses to the extent of reported winnings.
5. Not taking required minimum distributions
The IRS wants to be sure that owners of IRAs and participants in 401(k)s and other workplace retirement plans are properly taking and reporting their required minimum distributions (RMDs). The agency knows some people aged 73 and older (75 and older beginning in 2033, 72 and older for 2020-22, and 70½ and older for years before 2020) haven’t taken their annual RMDs.
Those who fail to take the proper RMD amount can be hit with an excise tax penalty of as much as 25% of the shortfall. The penalty falls to 10% if the failure is corrected within two years.
- However, you needn’t pay the fine at all if you can demonstrate that you had reasonable cause for failing to take the shortfall and you are taking steps to remedy the issue.
- If you think you are on solid ground, follow the instructions on Form 5329 and attach a letter of explanation to your 1040. If you’re asking IRS to waive the fine, don’t pay the penalty up front with your return.
- The fine will be due only if and when IRS denies relief and notifies you of its decision.
It is also important to know that there have been changes to the rules for many non-spousal beneficiaries of IRAs inherited after 2019. If you're unsure about when you are required to take RMDs, consult a professional.
6. Claiming large charitable deductions
We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. And retirees especially like to make donations to their alma mater, place of worship, a non-profit arts organization, an animal protection shelter, or to any other charities that are near or dear to their hearts. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.
- That's because the IRS knows what the average charitable donation is for people at your income level.
- Also, if you don't get a written appraisal for donations of property valued at more than $5,000, or if you fail to file Form 8283 for noncash donations over $500, you become an even bigger audit target.
- And if you've donated a conservation or facade easement to charity, or if you are an investor in a partnership, LLC or trust that made such a donation, your chances of hearing from the IRS rise exponentially.
Be sure to keep all your supporting documents, including receipts for cash and property contributions made during the year.
7. Running a business
Schedule C is a treasure trove of tax deductions for self-employed individuals. But it’s also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don't report all their income.
- The IRS looks at both higher-grossing sole proprietorships and smaller ones.
- Sole proprietors reporting at least $100,000 of gross receipts on Schedule C, cash-intensive businesses, and business owners who report a substantial loss and have income from other sources such as wages or retirement income, have a higher audit risk.
- Also, claiming large business deductions can raise eyebrows at the IRS, as well as claiming losses or deductions incurred between related parties.
If you’re semi-retired but still running your own business, or if you have a side business in your golden years, be sure to accurately report all your income and keep good records and receipts to document expenses you claim on your return.
Sloppy recordkeeping makes it easy for a revenue agent to disallow your deduction.
8. Deducting hobby losses on Schedule C
Your chances of "winning" the audit lottery increase if you file a Schedule C with large losses from an activity that might be a hobby, such as dog breeding, jewelry making, horse racing, or coin and stamp collecting.
Your audit risk grows further if you have multiple years of hobby losses and lots of income from other sources. So be careful if your retirement pursuits include trying to convert a hobby into a moneymaking venture.
- To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit.
- If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you're in business to make a profit, unless the IRS establishes otherwise.
- The analysis is trickier if you can't meet these safe harbors. That's because the determination of whether an activity is properly categorized as a hobby or a business is then based on each taxpayer's facts and circumstances.
9. Failing to report a foreign bank account
The IRS is intensely interested in people with money stashed outside the U.S., especially in countries with the reputation of being tax havens, and U.S. authorities have had lots of success getting foreign banks to disclose account information.
Failure to report a foreign bank account can lead to severe penalties. Make sure that if you have any such accounts, you properly report them. This means electronically filing FinCEN Report 114 (FBAR) by April 15, 2026, to report foreign accounts that combined total more than $10,000 at any time during 2025. (Filers who miss the April 15 deadline get an automatic six-month extension to file the form.)
Taxpayers with a lot more financial assets abroad may also have to attach IRS Form 8938 to their timely filed federal income tax returns.
10. Claiming large rental losses
Do you own some rental properties that help to provide a consistent revenue stream in your retirement years? Maybe you regularly claim large depreciation deductions and other write-offs on Schedule E that end up generating a tax loss from your rental activity. Claiming a large rental loss can command the IRS's attention, especially if the loss helps to offset income from other sources that you report on your return.
Normally, the passive loss rules prevent the deduction of rental real estate losses.
But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. This $25,000 allowance phases out as modified adjusted gross income exceeds $100,000 and disappears entirely once your modified AGI reaches $150,000.
A second exception applies to real estate professionals who spend more than 50% of their working hours and more than 750 hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off rental losses.
The IRS actively scrutinizes large rental real estate losses. If you're managing properties in your retirement, you may qualify under the second exception. Or, if you sell a rental property that produced suspended passive losses, the sale opens the door for you to deduct the losses.
Just be ready to explain things if a big rental loss prompts questions from the IRS.
11. Non-filers
The IRS hasn't always been diligent in pursuing individuals who don't file required tax returns.
In fact, the agency has been chastised by Treasury inspectors and lawmakers for its years-long lack of enforcement activity in this area. So, it shouldn't come as a surprise that high-income non-filers are on the list of the IRS's strategic enforcement priorities.
The primary emphasis is on individuals who received income in excess of $100,000 but didn't file a tax return. Collections officers will contact taxpayers and work with them to help resolve the issue and bring them into compliance. People who refuse to comply can be subject to levies, liens, or even criminal charges.
