Although the overall individual audit rate is only about one in 119, the odds increase dramatically 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.
IRS statistics show that people with incomes of $200,000 or higher had an audit rate of 2.61%, or one out of every 38 returns. Report $1 million or more of income? There’s a one-in-13 chance your return will be audited. The audit rate drops significantly for filers reporting less than $200,000: Only 0.76% (one out of 132) of such returns were audited, and the vast majority of these exams were conducted by mail.
We’re not saying you should try to make less money—everyone wants to be a millionaire. Just understand that the more income shown on your return; the more likely it is that you’ll be hearing from the IRS.
IRS Audit Red Flags for Retirees
Failing to Report All Taxable Income
The IRS gets copies of all 1099s and W-2s you receive. This includes the 1099-R (reporting payouts from retirement plans, such as pensions, 401(k)s and IRAs) and 1099-SSA (reporting Social Security benefits).
Make sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a tax form showing income that isn’t yours or listing incorrect income, get the issuer to file a correct form with the IRS.
Taking Higher-Than-Average Deductions
If deductions 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. But if you have the proper documentation for your deduction, don’t be afraid to claim it. There’s no reason to ever pay the IRS more tax than you actually owe.
Claiming Large Charitable Deductions
We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. 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 folks at your income level. Also, if you don’t get an appraisal for donations of valuable property, 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 façade easement to a charity, chances are good that you’ll hear from the IRS.
Be sure to keep all your supporting documents, including receipts for cash and property contributions made during the year.
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 required minimum distributions. The agency knows that some folks age 70½ and older aren’t taking their annual RMDs, and it’s looking at this closely.
Those who fail to take the proper amount can be hit with a penalty equal to 50% of the shortfall. Also on the IRS’s radar are early retirees or others who take payouts before reaching age 59½ and who don’t qualify for an exception to the 10% penalty on these early distributions.
Individuals age 70½ and older must take RMDs from their retirement accounts by the end of each year. However, there’s a grace period for the year in which you turn 70½: You can delay the payout until April 1 of the following year. A special rule applies to those still employed at age 70½ or older: You can delay taking RMDs from your current employer’s 401(k) until after you retire (this rule doesn’t apply to IRAs). The amount you have to take each year is based on the balance in each of your accounts as of December 31 of a prior year and a life-expectancy factor found in IRS Publication 590-B.