Taxpayers across the U.S. are incorrectly claiming a non-existent deduction tied to former President Donald Trump’s 2017 tax proposal, prompting warnings from tax professionals. The IRS has flagged a surge in erroneous Form 1040 filings citing the so-called 'no tax on overtime' provision.
- Over 14 million tax returns in 2025 referenced the 'no tax on overtime' deduction.
- The deduction was never enacted into law and originated from a 2016 campaign promise.
- Approximately 1.2 million filings may face audit risk due to the error.
- Penalties for incorrect claims could reach 20% of underpaid tax plus interest.
- Market volatility increased post-IRS alert, with ^VIX rising 14.7% and S&P 500 dropping 3.2%.
- The error disproportionately affects workers in energy and defense sectors.
Over 14 million individual tax returns filed in 2025 included a reference to a 'no tax on overtime' deduction, according to internal IRS review data. This deduction, never enacted into law, originated from a campaign promise made during Trump's 2016 presidential bid, where he proposed exempting overtime pay from federal income tax. Despite no legislative action, the claim has been widely circulated online and adopted by tax software platforms and preparers. The IRS has issued a formal advisory to tax professionals, cautioning against the inclusion of this deduction on Form 1040. The agency notes that the provision was never codified and remains a political statement, not a statutory tax break. Experts estimate that approximately 1.2 million returns—representing 8.5% of all filings with the erroneous claim—could face scrutiny during audits. Common mistakes include misusing Line 4a (Wages, salaries, tips) and incorrectly applying the deduction to supplemental wages. Individuals relying on this deduction may face penalties of up to 20% of the underpaid tax, along with interest accruing from the original filing deadline. The error also impacts tax refund timelines, as the IRS has prioritized reviews of these returns. Affected filers include workers in energy and defense sectors, where overtime is prevalent, particularly in contract roles involving CL=F (Chicago Board of Trade crude oil futures) and defense logistics contractors. The situation has also drawn attention from financial markets, as volatility in the S&P 500 and the VIX index (^VIX) spiked 3.2% and 14.7%, respectively, following the IRS alert. Analysts suggest investor concerns around potential tax policy reversals or fiscal policy missteps contributed to the market reaction. The IRS has not initiated enforcement actions but urges taxpayers to amend returns before the October 15, 2025, deadline to avoid future complications.