If you are divorced and either receiving or paying alimony the IRS may start looking at how each of you reports on your tax return. When one of you takes a deduction for alimony, the other should be reporting it as income. This gets tricky, if for example, a payment is made late and isn’t received until early January and there is overlap in reporting.
According to the TIGTA report, the IRS tracks this transaction because there is a line next to the alimony deduction on the tax return that requires the ex-spouse’s Social Security number. The IRS is then able to match up each tax return and often will investigate if numbers look suspicious. Many times adjustments need to be made.
On a percentage basis, however, very few discrepancies are investigated. For example, in 2010, there were 567,887 returns deducting approx. $10 Billion in alimony. Almost half ex-spouse returns didn’t match. The net difference came to $2.3 Billion. Out of 266,190 unmatched returns, the IRS only audited 10,870. Only 2,000 further examinations were held after that. Only 4% of tax returns in which one of the pair was dead wrong were acted upon by the IRS. “This difference is significant” says Kevin Thompson, CPA, an expert in tax aspects of family law “and the IRS will find a way to close that gap.” If it is a simple mistake, than the service will offer adjustments and make the appropriate spouse make the corrections. “But, if this is a case of the paying spouse deducting more than they are provided by the agreement, this could get ugly. Even uglier than the divorce was initially.”
Unfortunately, this isn’t something that can be tracked accurately using just a computer. It can be argued in court that the payment qualifies as deductible alimony or not. Part of this may be because there is a lack of provision that payments terminate on the death of the recipient. Just because the agreement does not say that payments terminate at death, doesn’t mean that they will continue. It depends on state law.
Even though the computer may find the discrepancy, it usually involves a live person to sort out the mess. This usually involves arguments and appeals and court appearances. Thompson says “Caution must be taken and confirmations must be had. We have reached out to divorced people and asked for the confirmation of the alimony paid/received. When someone thinks the IRS is looking, they usually pay attention.”
The IRS is understaffed when it comes to enforcement personnel. They don’t always get to it right away if at all.
A tax professional will always take the position of what is most favorable for their client and point out risk factors. AICPA ethics forbid tax professionals from playing audit lottery. You may get caught for a number of reasons:
- Not reporting the interest and dividends you get a 1099 for.
- Claiming payments to the IRS that you didn’t actually make.
- Not picking up alimony that your ex deducted.
The IRS may not do anything about the above, but it’s better to be safe than sorry. It’s better to do things right in the first place.
It’s important that attorneys draft reasonable and clear agreements between two divorcing spouses to avoid any chance of making tax reporting mistakes.
TIGTA has recommended that the IRS send out warning notices to let people know they may need to amend their returns.
As the laws are written now, mismatches in alimony reporting cannot be fixed without enough IRS staffing in that area and Congress is not providing that. Until that happens, making sure you are compliant with the current laws is the safer way to go.