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Overtime Deduction Audit Triggers: Three Red Flags That Guarantee IRS Review

How to Avoid Getting Flagged for the New Overtime Premium Deduction

The new overtime premium tax deduction (up to $12,500) is one of the major refund boosters introduced under recent tax changes — but it also happens to be one of the most closely monitored. The IRS is aggressively scanning returns for improper claims, especially those that do not match employer-reported data.

If you claim this deduction incorrectly, you may trigger a review, a refund freeze, and in some cases a full examination signaled by TC 420 (Examination/Audit) on your tax transcript.

Here are the three major red flags that the IRS is watching for.

1. Claiming Overtime Deduction Amounts Not Supported by W-2 Box 14 Reporting

This is the single highest-risk mistake.

The overtime deduction only applies to the premium portion of overtime — the extra 0.5 pay above regular hourly wage.

For employees, the IRS requires employers to report this premium overtime in Box 14 of the W-2 under a designated code such as:

  • OT-PRM
  • OTDeduction
  • HALFTIME
  • OT-Extra
  • etc.

If you claim overtime deduction but your W-2 does not show these values, the IRS system flags the return.

The IRS simply says:

“If your employer did not report it, you cannot deduct it.”

This mismatch often results in:

  • TC 570 — Refund Hold
    and potentially
  • TC 420 — Examination

2. Claiming the Deduction While Filing as Married Filing Separately (MFS)

This is a lesser-known trap.

Why?

Because the IRS statistically associates MFS returns with:

  • income splitting to reduce taxable income
  • improper credit/deduction claims
  • refund manipulation
  • higher risk of filing inconsistencies

If you file MFS and take the overtime deduction, the return is much more likely to be tagged for manual scrutiny.

Especially if:

  • both spouses claim the deduction
  • only one spouse has overtime wages
  • wages are uneven across filers

While MFS filers can claim the deduction, it is automatically flagged as higher risk, and may require verification.

3. Claiming a Higher Overtime Amount Than the Employer Reported

This one is straightforward:

If you claim:

$5,000 in overtime deduction

but Box 14 shows:

$3,100 in premium overtime

The IRS immediately stops the return and requests clarification.

Taxpayers sometimes over-claim because:

  • they assume overtime wage equals overtime deduction
  • they estimate based on paystubs
  • they include holiday pay or shift bonuses
  • they calculate incorrectly

But the IRS considers the employer-reported value the authoritative figure.

Your number must match — or be lower — than the amount the employer reported.

Bonus: Two Additional Risk Factors (Honorable Mention)

Multiple W-2s with overtime deductions

If you have multiple job employers, the IRS will verify each W-2 Box 14 entry.

Large refund + deduction claim

If your return includes:

  • EITC
  • ACTC
  • Overtime Deduction
  • Tip Deduction
  • Senior Deduction
  • or multiple OBBB deductions

The IRS may review the entire return in aggregate.

How to Avoid Trouble

  • Verify your W-2 Box 14 overtime number
  • Do not estimate
  • Do not inflate
  • Do not guess
  • Do not use gross overtime
  • Do not use hours × full overtime rate

Use only the overtime premium amount reported by your employer.

If the W-2 is missing overtime data:

  • contact payroll
  • request a corrected W-2c
  • get documented clarification
  • upload verification if asked
  • don’t rush the filing

What If You Already Triggered a Review?

Watch for:

  • TC 570 — Refund Hold
  • TC 971 — Notice Issued
  • TC 420 — Examination

Next steps may include:

  • submitting paystubs
  • submitting employer verification
  • providing timecard/hour logs
  • providing payroll earnings statements

If your employer made a mistake, YOU will still be the one dealing with the delay.

The IRS is not denying the overtime deduction — they’re simply making sure it’s used correctly.

You are safe if:

  • your W-2 lists the deduction amount
  • you claim the exact figure
  • your filing status is straightforward
  • you don’t exceed employer-reported numbers

You are at risk if:

  • Box 14 is blank
  • your deduction is higher than employer entries
  • you estimate the value
  • you file MFS without documentation

Claim it correctly — and it can significantly boost your refund. Claim it wrong — and it can significantly delay it.

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