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.
