Federal Agency Finds Huge Tax Gap in Alimony Deductions and Payments

 Posted on August 14, 2014 in Spousal Support

Alimony payments are part of the final settlement in many complex divorces. A recent study by the IRS has uncovered major discrepancies between alimony deductions and alimony payments on 2010 federal tax returns.

According to IRS rules, alimony that is paid to someone under a high asset legal separation or divorce agreement can be used as a deduction from a person's income for purposes of paying federal taxes. Conversely, a person receiving alimony payments under a legal separation or divorce agreement is required to report that money as income on their federal tax return.

However, a study completed by the Treasury Inspector General for Tax Administration (TIGTA) of tax returns from 2010 revealed a $2.3 billion tax gap between alimony deductions taken and alimony payments reported. There was a total of $10 billion dollars claimed as alimony payment deductions by 567,887 people in 2010. But 47 percent of those deductions had no corresponding alimony payment reported. TIGTA reported that part of the problem comes from the IRS not requiring a valid taxpayer identification number (TIN) when claiming alimony deductions.

The agency currently has no procedures which would correct this large tax gap. There are also no IRS filters in place which would examine whether or not there are corresponding payments and deductions. These filters would help ensure alimony income and deduction compliance.

In their report, TIGTA urged the IRS to come up with a system that would eliminate the alimony tax gap. They also recommended that the divisions that handle the current filters for self-employment, small businesses, investments, and wages develop a way to catch tax returns using alimony payments as a deduction.

Another recommendation TIGTA made was to require all tax filers claiming an alimony payment reduction to provide a valid TIN number for the person who received the payments. The IRS objected to this recommendation, saying the agency does not have the authority to deny returns that do not contain that information. However, the IRS did agree to TIGTA's recommendation of accessing penalties for returns that did not have a valid TIN number for the payment recipient.

If you are considering divorce where there will be high asset or complex property litigation, make sure to hire an aggressive Williamson County complex divorce attorney to begin planning and strategizing to ensure you receive all that you are entitled to in your divorce settlement.