The IRS is enhancing processes to address the discrepancies between the deductions taken by alimony payers and the income reported by alimony recipients. This is in response to a report of the Treasury Inspector General for Tax Administration issued March 31, 2014 (TIGTA #2014-40-022).
Alimony is a payment to or for the benefit of a spouse or former spouse under a divorce or separation instrument, including decrees and certain agreements. If classified as alimony under the Internal Revenue Code, the amount is entitled to be deducted by the payor and the same amount must be included in the income of the recipient.
For 2010, a total of 567,887 taxpayers claimed alimony deductions totaling more than $10 billion. For that same year, with 266,190 (47%) of those alimony payors’ tax returns, there was either no alimony income reported, or there was a different amount of income reported on the returns filed by the corresponding alimony recipients. Bottom line: $2.3 billion in total alimony deductions had not been reported as income by the recipients.
The report also noted that IRS processes do not ensure that the taxpayers taking an alimony deduction report the social security number (Taxpayer Identification Number [TIN]) of the recipient. Moreover, the IRS failed to assess penalties totaling $324,900 on alimony payors who did not provide the recipients’ tax identification numbers.
IRS has responded that it has enhanced its examinations. Filters have been improved and the IRS will continue to review and improve its strategy to reduce the compliance gap. In addition, the IRS has revised its procedures to ensure the penalties are assessed when appropriate.