You may have left the workforce years ago, but that doesn’t mean the IRS has stopped paying attention to your finances. A forgotten retirement account withdrawal, an incorrectly reported investment sale, or a missing tax form could result in an unexpected letter from the federal government. For retirees living on fixed incomes, additional taxes, interest, and penalties can quickly become an expensive problem.
The IRS uses automated systems to compare tax returns with information submitted by banks, employers, retirement plan administrators, and other financial institutions. According to the agency’s 2026 compliance statistics, the IRS closed 497,621 tax return audits during fiscal year 2025, resulting in $26.8 billion in recommended additional taxes.
However, there is no clear evidence that the IRS has launched a new audit campaign specifically targeting retirees. What retirees should understand is that ordinary reporting mistakes can trigger IRS notices, and some discrepancies may lead to closer examination.
Here are six tax mistakes that could put your retirement savings at risk.
1. Forgetting to Report Retirement Account Withdrawals
Retirees frequently receive income from multiple sources, including pensions, traditional IRAs, 401(k)s, and other retirement accounts. When money is withdrawn from these accounts, the financial institution generally reports the distribution to the IRS using Form 1099-R. According to the IRS Automated Underreporter Program, the agency compares information submitted by financial institutions with amounts reported on individual tax returns. For example, a retiree who withdraws $15,000 from an IRA but accidentally omits the distribution from their tax return could receive a notice proposing additional taxes. Even when part of a distribution is nontaxable, accurately reporting the transaction and maintaining supporting documentation can help prevent costly misunderstandings.
2. Missing Required Minimum Distributions
Required minimum distributions, commonly called RMDs, are another potential financial trap for older Americans. Under current IRS retirement distribution rules, many traditional IRA and retirement account owners must begin taking annual withdrawals at age 73, although the starting age depends on birth year and certain exceptions apply. Failing to withdraw the required amount can result in a 25% excise tax on the shortfall, reduced to 10% if the mistake is corrected within the applicable correction window. For someone who misses a $12,000 required distribution, the initial excise tax could reach $3,000 before any available correction or waiver. Retirees should verify their annual RMD amounts with their account custodians and review the IRS rules for correcting reasonable errors rather than assuming the financial institution will automatically handle everything.
3. Misreporting Investment Sales or Property Gains
Selling stocks, mutual funds, cryptocurrency, or real estate can create tax obligations that retirees don’t always anticipate. Brokerage firms generally provide tax documents showing investment transactions, but the reported information may not always reflect the taxpayer’s complete cost basis or individual circumstances. Consider someone who sells inherited stock for $40,000 and mistakenly reports the entire amount as taxable profit without accounting for the applicable inherited-property basis rules. The IRS capital gains guidance explains that taxable gains generally depend on the difference between the sale proceeds and the asset’s adjusted basis. Keeping brokerage statements, inheritance records, and documentation of property improvements can help retirees calculate gains accurately and respond if the IRS questions a transaction.
4. Overlooking Taxes on Social Security Benefits
Many retirees are surprised to discover that Social Security benefits aren’t always exempt from federal income taxes. According to the Social Security Administration, up to 85% of benefits may be included in taxable income when a beneficiary’s combined income exceeds certain thresholds. For example, an individual receiving Social Security along with pension payments and IRA withdrawals may owe federal income taxes even if Social Security represents their primary source of retirement income. Confusion can arise when retirees assume that receiving a Form SSA-1099 means their benefits have already been taxed or that the full amount is automatically tax-free. Reviewing Social Security income alongside other retirement distributions before filing can help prevent underreporting and unexpected tax bills.
5. Claiming Deductions Without Proper Documentation
Tax deductions can help reduce retirement expenses, but incorrectly claimed deductions may also attract IRS scrutiny. Medical expenses, charitable contributions, and certain other itemized deductions have specific eligibility rules and documentation requirements. For instance, the IRS explains that qualifying unreimbursed medical expenses generally are deductible only to the extent they exceed 7.5% of adjusted gross income when a taxpayer itemizes deductions. A retiree who deducts every dollar spent on prescriptions, dental care, and medical appointments without applying that threshold could substantially overstate the deduction. Maintaining receipts, reviewing eligibility requirements, and comparing itemized deductions with the available standard deduction can help prevent mistakes while ensuring retirees don’t overlook legitimate tax savings.
6. Ignoring an IRS Notice Because You Think It’s a Scam
With tax-related scams becoming increasingly sophisticated, some retirees understandably hesitate when an unexpected IRS letter arrives. However, ignoring legitimate correspondence can make an otherwise manageable tax issue more expensive and complicated. The IRS explains that a CP2000 notice generally means information reported by a third party doesn’t match the taxpayer’s return, but it isn’t itself an audit or a bill. A retiree who receives a notice about an unreported pension distribution should review the figures, compare them with tax documents, and respond by the stated deadline rather than automatically paying or disregarding the letter. To verify suspicious correspondence, use contact information obtained independently from IRS.gov instead of calling unfamiliar numbers or following unexpected links.
What Happens if the IRS Actually Audits Your Return?
Receiving an IRS audit notice doesn’t automatically mean you’ve done something wrong or that additional taxes will be owed. According to the Taxpayer Advocate Service’s March 2026 guidance, audits may take place through correspondence or in-person examinations, depending on the circumstances. The notice should explain what the IRS is reviewing, which documents 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 that you disagree with, you can provide supporting evidence and explore the applicable appeal or review procedures.
Protecting Your Retirement Savings Starts With Accurate Records
The financial consequences of a tax mistake can extend well beyond the original amount owed, particularly when interest and applicable penalties accumulate. Fortunately, many problems can be avoided by carefully reviewing retirement distributions, investment transactions, Social Security income, and deductions before filing. Retirees should also keep important tax documents organized and promptly investigate any discrepancies identified by the IRS. If a complicated retirement transaction or unexpected tax notice arises, professional guidance may help prevent a relatively small mistake from becoming a much larger expense. Staying informed about IRS reporting requirements is one of the simplest ways to protect the money you’ve worked decades to save.
Have you ever received an unexpected IRS notice after retiring? Was it caused by a reporting mistake, missing tax form, or something else? Share your experience in the comments.
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