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Retirement and the possibility of a tax audit

The last thing any retiree wants to encounter is a tax audit. Unfortunately, actions taken regarding a retirement account can bring you to the attention of the IRS. This is particularly true for retirees with significant incomes.

A Kiplinger report lists ways that retirees find themselves subject to an audit. Failing to report all taxable income always can trigger an audit. You can also face an audit if the deductions on your return are disproportionately high. For example, when deducting an expense for medical treatment, it is important to closely document the deduction.

Other actions can bring you to the attention of the IRS as well. Deducting charitable contributions sometimes can trigger an audit. This is especially true when deductions are significantly large compared to income. When taking charitable deductions, it is important to have an appraisal of donations made. You will also need to fill out the proper tax forms for noncash donations worth over $500. Keeping receipts for cash or property contributions can prevent problems from arising.

Retirees can also face IRS scrutiny for claiming a large rental real estate loss. Retirees need to report gambling winnings and write off expenses related to gambling winnings incorrectly. Deductions for hobby expenses can raise red flags. And failing to report information regarding a foreign account can lead to an audit.

To complicate matters for retirees even more, there are minimum distribution rules that taxpayers may not be aware of. When retirees reach the age of 70 1/2, these individuals generally need to withdraw a minimum amount from their 401(k) and IRA every year. The penalty for failing to do so can be significant as it could add up to 50 percent of the shortfall amount. On the other hand, those that make a withdrawal prior to the age of 59 1/2 (without qualifying for an exception) will face a 10 percent penalty on the distribution.

As there are so many items that can result in the triggering of an audit, retirees could better understand what actions to take and actions to avoid by speaking to a tax law attorney. Sometimes it is also necessary to have legal representation on your side when an audit occurs to demonstrate you took tax deductions in good faith.

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