Alimony Compliance Gap Raises Issues
The IRS needs to significantly improve its oversight of alimony deductions, the Treasury Inspector General for Tax Administration (TIGTA) has cautioned in a recent audit report. Alimony paid to or for a spouse or former spouse under a divorce or separation instrument is generally deductible from the payer's income and taxable to the recipient's income. TIGTA estimated the "alimony compliance gap" at more than $2.3 billion.
In Tax Year (TY) 2010, approximately 570,000 taxpayers claimed alimony deductions totaling more than $10 billion, TIGTA reported. TIGTA discovered that the IRS did not properly oversee these deductions. Some individuals improperly claimed deductions for alimony that they did not pay and others did not report the alimony they received.
Payments that qualify as alimony or separate maintenance are included in the payee-spouse's gross income, just as are wages, salary, dividends, and the like, and are deductible from the payer-spouse's gross income. The inclusion and the deduction are intended to be reciprocal. Among other requirements, only payments made under a divorce or separation instrument are deductible as alimony; voluntary payments are not deductible as alimony.
TIGTA's discovered that 47 percent of TY 2010 returns contained a claim for an alimony deduction for which the corresponding income was either not reported on a recipient's return or the amount of alimony income reported did not agree with the deduction. TIGTA's investigation also revealed improper enforcement of the requirement that the payor include the Taxpayer Identification Number (TIN) of the recipient on his or her tax return.
The IRS will reject a return filed electronically if the recipient's TIN is missing or incomplete. In the case of paper returns, the IRS will suspend processing of the return and contact the filer. The IRS may impose a $50 penalty when a taxpayer fails to provide a valid recipient TIN.
However, TIGTA discovered that approximately 3,700 returns claiming an alimony deduction did not provide the recipient's TIN and 2,700 returns contained an invalid TIN. In addition, due to errors in the processing instructions, the IRS failed to assess nearly $325,000 in penalties on individuals who did not provide a valid recipient TIN as required.
TIGTA recommended, and the agency agreed, that the IRS enhance its examination selection filters for high-risk returns with questionable alimony deduction claims. Additionally, the IRS agreed with TIGTA's recommendation that penalties are not being assessed in all cases where a return lacks a valid recipient TIN and would work to improve the assessment of penalties.
For more information, please contact your Brown Smith Wallace Tax Advisor, or Roy Kramer, at 314.983.1265 or firstname.lastname@example.org.