Discrepancies in Alimony Deductions

Posted by Jeffrey Siegel on May 27, 2014

Discrepancies Seen in Nearly Half of Alimony Deductions Reported to IRS

(From Accounting Today)

Nearly half the tax returns on which individuals claimed tax deductions for alimony payments did not match up with their former spouse’s tax returns, showing a total alimony gap of over $2.3 billion in 2010, according to a new government report.

The report, from the Treasury Inspector General for Tax Administration, found 266,190 tax returns for 2010 in which individuals claimed alimony deductions for which income was not reported on a corresponding recipient’s tax return, or the amount of alimony income that was reported did not agree with the amount of the deduction taken. The 266,190 returns represented approximately 47 percent of all tax returns on which alimony deductions were claimed. In tax year 2010, 567,887 taxpayers claimed alimony deductions totaling more than $10 billion.

TIGTA initiated the audit to evaluate whether there is an alimony reporting gap and to assess controls the Internal Revenue Service has in place to promote alimony reporting compliance. Apart from examining a small number of tax returns, the IRS generally has no processes or procedures to address this substantial compliance gap, TIGTA found.

IRS processes also do not ensure that individuals provide a valid recipient Taxpayer Identification Number, or TIN, when claiming an alimony deduction as required. TIGTA’s analysis of the 567,887 tax year 2010 returns that claimed an alimony deduction identified an estimated 6,500 tax returns claiming an alimony deduction for which the IRS did not identify that the recipient TIN was missing or invalid. In addition, because of errors in IRS processing instructions, the IRS did not assess penalties totaling $324,900 on individuals who did not provide a valid recipient TIN as required.

Individuals who pay alimony can deduct the amount paid from income on their tax return to reduce the amount of tax an individual must pay. Alimony recipients must, in turn, claim the amount received as income on their tax return. An alimony income reporting discrepancy occurs either when individuals claim deductions for alimony which they did not pay or individuals do not report alimony income they received.