IRS Alerts: Common Tax Mistakes That Can Catch Retirees Off Guard

You may be out of the workforce, but that does not mean the IRS has stopped monitoring your tax filings. An overlooked retirement withdrawal, an inaccurately reported investment sale, or a missing form can trigger an unexpected notice from the agency. For retirees on fixed incomes, added taxes, interest, and penalties can become a costly headache.

The IRS relies on automated matching systems to compare tax returns with information submitted by banks, employers, retirement plan administrators, and other financial institutions. In its latest compliance statistics, the agency said it closed 497,621 tax return audits during fiscal year 2025, producing $26.8 billion in recommended additional taxes.

There is no clear evidence that the IRS has started a fresh audit effort aimed specifically at retirees. Still, routine reporting errors can lead to IRS notices, and some mismatches may prompt closer review.

Below are six tax errors that could put retirement savings at risk.

1. Failing to Report Retirement Withdrawals

Retirees often receive income from several sources, including pensions, traditional IRAs, 401(k)s, and other retirement accounts. When money is taken from these accounts, the financial institution usually reports the distribution to the IRS on Form 1099-R. Under the IRS Automated Underreporter Program, the agency compares information from financial institutions with the amounts shown on individual tax returns. For example, if a retiree withdraws $15,000 from an IRA but leaves the distribution off the return by mistake, the IRS may send a notice proposing extra taxes. Even when part of a distribution is not taxable, reporting it correctly and keeping backup records can help avoid expensive confusion.

2. Missing Required Minimum Distributions

Required minimum distributions, or RMDs, can also create trouble for older taxpayers. Under current IRS retirement distribution rules, many owners of traditional IRAs and retirement accounts must begin annual withdrawals at age 73, though the starting age depends on birth year and some exceptions apply. If the required amount is not withdrawn, a 25% excise tax can apply to the shortfall, reduced to 10% if the error is corrected within the allowed correction window. If someone misses a $12,000 required distribution, the initial excise tax could be $3,000 before any correction or waiver. Retirees should confirm their RMD amounts with account custodians and review the IRS rules for fixing reasonable errors instead of assuming everything will be handled automatically.

3. Reporting Investment Sales or Property Gains Incorrectly

Selling stocks, mutual funds, cryptocurrency, or real estate can create tax obligations that retirees may not expect. Brokerage firms usually issue tax documents showing investment activity, but those records may not reflect the taxpayer’s full cost basis or personal circumstances. Consider someone who sells inherited stock for $40,000 and mistakenly reports the entire amount as taxable profit without applying the appropriate inherited-property basis rules. IRS capital gains guidance says taxable gains generally depend on the difference between sale proceeds and the asset’s adjusted basis. Keeping brokerage statements, inheritance records, and documentation of property improvements can help retirees calculate gains correctly and respond if the IRS questions a transaction.

4. Overlooking Taxes on Social Security Benefits

Many retirees are surprised to learn that Social Security benefits are not always free from federal income tax. According to the Social Security Administration, up to 85% of benefits may count as taxable income when a beneficiary’s combined income goes above certain thresholds. For example, a person receiving Social Security along with pension payments and IRA withdrawals may still owe federal income tax even if Social Security is their main source of retirement income. Confusion often arises when retirees assume that receiving Form SSA-1099 means the benefits have already been taxed or that the full amount is automatically tax-free. Reviewing Social Security income together with other retirement distributions before filing can help prevent underreporting and surprise tax bills.

5. Taking Deductions Without Proper Proof

Tax deductions can help reduce retirement expenses, but improperly claimed deductions may draw IRS attention. Medical expenses, charitable gifts, and other itemized deductions have specific eligibility rules and documentation standards. For instance, the IRS says qualifying unreimbursed medical expenses are generally deductible only to the extent they exceed 7.5% of adjusted gross income when a taxpayer itemizes. A retiree who deducts every dollar spent on prescriptions, dental care, and doctor visits without applying that threshold could overstate the deduction. Keeping receipts, checking eligibility rules, and comparing itemized deductions with the standard deduction can help avoid mistakes while preserving legitimate tax savings.

6. Disregarding an IRS Notice Because It Looks Like a Scam

Because tax scams have become more convincing, some retirees hesitate when an unexpected IRS letter arrives. But ignoring valid correspondence can make a manageable tax problem more expensive and more complicated. The IRS says a CP2000 notice usually means information from a third party does not match the taxpayer’s return, though it is not itself an audit or a bill. A retiree who gets a notice about an unreported pension distribution should check the figures, compare them with tax documents, and reply by the deadline rather than ignoring it or paying blindly. To verify questionable correspondence, use contact information taken directly from IRS.gov instead of calling unfamiliar numbers or clicking unexpected links.

What Happens if the IRS Audits Your Return?

Getting an IRS audit notice does not automatically mean something is wrong or that extra tax is due. According to guidance from the Taxpayer Advocate Service, audits may be handled through correspondence or in-person examinations depending on the circumstances. The notice should explain what the IRS is reviewing, which records are needed, and how the taxpayer should respond. Retirees have the right to seek representation from a qualified attorney, certified public accountant, or enrolled agent during an examination. If the IRS proposes changes you disagree with, you can submit supporting evidence and use the available appeal or review process.

Keeping Retirement Savings Protected Starts With Good Records

The financial impact of a tax mistake can go well beyond the original amount owed, especially once interest and penalties are added. Many problems can be avoided by carefully reviewing retirement withdrawals, investment transactions, Social Security income, and deductions before filing. Retirees should also keep tax documents organized and promptly check any discrepancies the IRS identifies. If a complicated retirement transaction or an unexpected notice arises, professional help may keep a small mistake from turning into a much larger expense. Staying aware of IRS reporting rules is one of the simplest ways to protect the money you spent decades saving.