Big IRA Mistakes Trigger IRS Alerts—One Red Flag Every Retiree Must Avoid

The good news for most retirees is that the odds of an IRS audit are very low. In 2018, the agency audited just 0.59% of all individual tax returns. That means you're more likely to win the lottery than to get picked for a full audit. Furthermore, the vast majority of these reviews are conducted by mail, so you likely won't have to meet with an agent in person.

But the IRS doesn't pick returns at random. With limited resources, they use sophisticated computer algorithms to target the returns most likely to yield additional tax revenue. The primary tool is the Discriminant Information Function (DIF) score, which compares your return against statistical norms for people with similar income and filing characteristics. A return that deviates significantly-whether due to unusually high deductions or other anomalies-gets flagged.

While the baseline risk is low for typical retirees with simple returns, specific retirement-related actions can raise red flags. The audit rate is projected to rise for high-income individuals, and retirees who sell property or receive a large payout from a retirement plan may see their income cross thresholds that attract more scrutiny. For example, in 2018, the audit rate for those with incomes over $1 million was about one in 31, compared to less than one in 170 for the general population.

The bottom line is that the IRS uses data, not guesswork. If you file a straightforward return with accurate reporting, your chances of an audit are minimal. But if you claim large deductions, fail to report all taxable income, or have a complex financial picture, you're moving into the higher-risk zone that the agency's systems are designed to catch.

The 5 Biggest Mistakes Seniors Make

The IRS's computer systems are designed to spot anomalies, and retirees are not immune. While the overall audit rate is low, specific behaviors consistently raise red flags. Here are the five most common mistakes that can trigger an unwelcome notice.

1. Claiming a Medical Deduction That's Too Big for Your Income The IRS looks for deductions that seem out of proportion. A medical expense deduction that consumes a large chunk of your adjusted gross income is a classic red flag. For example, if you have a modest income but claim thousands in unreimbursed medical costs, the system will note the deviation. The consequence isn't just an audit; it's a high risk of the deduction being disallowed, leaving you with a larger tax bill and potentially interest and penalties.

2. Forgetting Required Minimum Distributions (RMDs) Retirement accounts like traditional IRAs and 401(k)s are not meant to be tax-free vaults. The IRS requires you to start taking withdrawals, known as Required Minimum Distributions, once you reach age 73. Failing to report these distributions as taxable income is a major oversight. The IRS matches these withdrawals with the account custodian's reports, so this mismatch is almost guaranteed to trigger a notice. The penalty for missing an RMD can be severe-up to 25% of the amount that should have been withdrawn.

3. Excessive or Poorly Documented Deductions This includes claims like a large home office deduction for part-time work. The IRS requires you to prove the space is used exclusively and regularly for business. Without clear records of square footage, business use percentages, and related expenses, the deduction is vulnerable. The system flags returns where deductions seem disproportionately high compared to income or business activity. The result is often an audit where you must provide the missing documentation, and if you can't, the deduction is likely lost.

4. Taking a Big Loss from Selling Rental Property or Investments While selling an asset at a loss is allowed, a large, unexplained loss can draw scrutiny. The IRS is particularly watchful for "wash sales" or sales that appear to be structured solely to offset other gains. If you sell a rental property for a significant loss, especially if you've recently purchased a similar property, the agency may investigate. The consequence is an audit to verify the sale's legitimacy and the accuracy of your cost basis, which could lead to a reassessment of your capital gains or losses.

5. Inconsistencies and Missing Forms Simple errors in reporting can be enough to trigger an automated review. This includes mismatched Social Security income reported on your 1099-SSA against your actual earnings, or failing to report income from a side gig. The IRS's data-matching systems are powerful; they compare your return against information from W-2s, 1099s, and other third-party reports. Leaving a form off your return or reporting a different amount than what was reported to the IRS creates a discrepancy that the system flags. This often leads to a CP 2000 notice, which demands you explain or correct the error.

How to Fix Them with Simple Steps

The good news is that most audit triggers are preventable with a few common-sense habits. You don't need a law degree, just a little organization and a proactive mindset. Here are four straightforward steps to keep your return on solid ground.

First, every deduction needs proof in your pocket. Whether it's a medical expense or a home office, the IRS expects to see the receipts. For medical costs, that means bills and statements. For a home office deduction, you'll need to document the square footage and prove it's used exclusively for business. The system flags returns where deductions seem too large for the income reported. Having the paperwork ready not only supports your claim but also speeds up any potential review. As one expert notes, "one of the best ways to avoid that [an audit] is to make sure that you are fully and completely reporting everything."

Second, report every single dollar of income, even if you don't get a 1099. The IRS matches your return against forms it receives from employers, banks, and brokers. If you have a side gig, rental income, or a Required Minimum Distribution from an IRA, you must report it. The agency's data-matching systems are powerful; a missing income source is a direct path to a CP 2000 notice. "Every deduction needs documentation; every income source must be reported, even without a form." Don't assume the IRS won't know-its computers do.

Third, use your tools and double-check your work. Tax software with built-in validation can catch common errors before you file. More importantly, compare this year's return to your prior filings. Did your income jump? Did your deductions change dramatically? These shifts can trigger the DIF score. A simple review can catch a typo or a missing form. As the IRS faces staffing challenges, "it's important to file your returns accurately the first time." A rushed filing with incomplete forms is more likely to raise a red flag.

Finally, for complex situations, a CPA is your best ally. If you have rental properties, a side business, or a complicated retirement plan, the rules get intricate fast. A certified public accountant can help structure your filings to minimize risk and ensure compliance. More importantly, if you are contacted by the IRS, having a professional to guide you through the process can significantly reduce stress and the chance of an unfavorable outcome. As the evidence suggests, "a CPA can significantly reduce your audit risk and help you respond effectively if contacted."

The bottom line is that being proactive and organized is the simplest defense. Gather your documents early, use the tools available, and don't hesitate to seek help when the numbers get complicated. It's about building a solid foundation for your return, not just checking boxes.