After divorce, taxpayers may be paying alimony, which they can deduct from their returns, or they may be receiving alimony, which they must declare as income. It doesn't take advanced mathematics to show that the two halves should add up—but that's not what's happening.
In a May 15 press release, the Treasury Inspector General for Tax Administration (TIGTA) announced the release of a report identifying problems with tax reporting on alimony. TIGTA says there's a $2.3 billion gap between the amount of alimony deductions claimed by taxpayers in 2010 and corresponding income reported. The analysis of 2010 returns with alimony deductions found that in 266,190 returns (47 percent), individuals claimed alimony deductions for which income was either not reported on a corresponding recipient's tax return or did not agree with the amount of the deduction taken.
The TIGTA report included the following table, an analysis of income reported by alleged recipients for tax year 2010. (The footnote explains that these returns may include instances in which individuals pay alimony to more than one recipient.)
IRS accepts most, but not all, of TIGTA's recommendations
Why is the alimony gap so large? According to the report, "Apart from examining a small number of tax returns, the IRS generally has no processes or procedures to address this substantial compliance gap." To that end, TIGTA made four recommendations:
Recommendation 1: Evaluate current examination selection filters to ensure that the filters do not inappropriately exclude potentially high-risk tax returns with questionable alimony deduction claims.
Recommendation 2: Develop a strategy that adequately addresses the significant alimony compliance gap. This strategy should include determining the net benefit of using soft notices as an alternative approach to address this issue, as well as actions the IRS plans to take with regard to individuals who continue to misreport alimony deductions and/or income.
Recommendation 3: Revise processes and procedures to ensure that all tax returns are verified for a required valid recipient TIN when an alimony deduction is claimed. These processes should include rejecting e-filed tax returns and sending paper tax returns to the IRS Error Resolution function for correspondence with the taxpayer.
Recommendation 4: Revise IRS processing instructions to ensure that penalties are assessed on applicable tax returns with an alimony deduction claim where a valid recipient TIN was not provided and ensure that the penalty is assessed in the correct amount.
The IRS agreed with all of these recommendations, except for the third, noting that it does not possess the authority to deny the alimony deduction outside of deficiency procedures. To which TIGTA shot back: "the lack of authority to deny an alimony deduction claim without conducting an examination does not preclude the IRS from notifying taxpayers that they are not compliant with the alimony reporting requirements…Establishing processes to communicate with all taxpayers who do not provide a valid recipient TIN provides the taxpayer the opportunity to voluntarily comply."
The report was issued on March 31 but only publicly released in mid-May because of TIGTA's internal review process.