$2.3 Billion of Taxable Income Disappears Via Alimony Reporting

Tax reporting for alimony payments is a relatively straightforward process.  Those who pay alimony deduct the amount on their tax return when calculating their taxable income.  Those who receive alimony must report the amount received as taxable income.  These requirements should result in a shifting of taxable income without changing the total amount.  In order to test this, the Treasury Inspector General for Tax Administration (“TIGTA”) initiated a focused audit to evaluate whether this is occurring.  The resulting report was recently released, revealing a shocking $2.3 billion gap.

There are only two reasons why this would occur: either the individuals who claim deductions for alimony are reporting amounts they did not pay or the individuals who receive alimony are not fully reporting it.  In 2010, 567,887 taxpayers claimed more than $10 billion of alimony deductions.  However, for 47% of those tax returns (representing 266,190 taxpayers), the TIGTA was either unable to identify a corresponding income report on a recipient’s tax return or the amount of alimony income reported did not agree with the amount of the deduction taken.

The TIGTA report reveals that, apart from examining a small number of tax returns, the IRS generally has no processes or procedures to address the matching of these amounts.  In fact, IRS processes do not even ensure that the Social Security number provided by the payer when claiming an alimony deduction is valid.  Of the 567,887 returns cited above, an estimated 6,500 tax returns had a missing or invalid Social Security Number and the IRS failed to assess penalties totaling $324,900.

This related article further describes the alimony process and the matching of payments that should occur.

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