Nearly half the tax returns on which individuals claimed tax deductions for alimony payments did not match up with their former spouse’s tax returns, showing a total “alimony gap” of over $2.3 billion in 2010, according to a new government report.
The report, from the Treasury Inspector General for Tax Administration, found 266,190 tax returns for 2010 in which individuals claimed alimony deductions for which income was not reported on a corresponding recipient’s tax return, or the amount of alimony income that was reported did not agree with the amount of the deduction taken. The 266,190 returns represented approximately 47 percent of all tax returns on which alimony deductions were claimed. In tax year 2010, 567,887 taxpayers claimed alimony deductions totaling more than $10 billion.
TIGTA initiated the audit to evaluate whether there is an alimony reporting gap and to assess controls the Internal Revenue Service has in place to promote alimony reporting compliance. Apart from examining a small number of tax returns, the IRS generally has no processes or procedures to address this substantial compliance gap, TIGTA found.
IRS processes also do not ensure that individuals provide a valid recipient Taxpayer Identification Number, or TIN, when claiming an alimony deduction as required. TIGTA’s analysis of the 567,887 tax year 2010 returns that claimed an alimony deduction identified an estimated 6,500 tax returns claiming an alimony deduction for which the IRS did not identify that the recipient TIN was missing or invalid. In addition, because of errors in IRS processing instructions, the IRS did not assess penalties totaling $324,900 on individuals who did not provide a valid recipient TIN as required.
Individuals who pay alimony can deduct the amount paid from income on their tax return to reduce the amount of tax an individual must pay. Alimony recipients must, in turn, claim the amount received as income on their tax return. An alimony income reporting discrepancy occurs either when individuals claim deductions for alimony which they did not pay or individuals do not report alimony income they received.
“The number and size of the alimony reporting discrepancies on federal tax returns is a concern,” said TIGTA Inspector General J. Russell George in a statement. “The IRS should consider the use of less costly processes, including notifying taxpayers of apparent discrepancies, to expand its ability to address the issue.”
TIGTA recommended that the IRS evaluate its current examination filters to ensure that potentially high-risk tax returns are not inappropriately excluded from examination and develop a strategy to address the significant alimony compliance gap. TIGTA also recommended that the IRS revise processes and procedures to verify that all tax returns include a valid recipient TIN when claiming an alimony deduction and correct errors in IRS processing instructions to ensure that a penalty is accurately assessed on all tax returns on which a valid recipient TIN is not provided.
The IRS agreed with three of TIGTA’s recommendations and disagreed with one recommendation. The IRS stated that it enhanced its examination filters and will continue to review and improve its strategy to reduce the compliance gap. In addition, the IRS revised procedures to ensure that penalties are assessed when appropriate. However, because the IRS does not have the authority to deny alimony deductions outside of deficiency processing, it believes verification of the deduction is more efficiently performed in its compliance function.
“We have implemented a strategy to address this gap which includes usage of a number of examination filters which we have developed and refined to isolate the most egregious returns for compliance activity,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “... We continue to monitor these examination filters to ensure our strategy adequately addresses the alimony reporting compliance gap.”
However, Schiller disagreed with some of the outcome measures in the TIGTA report and pointed out that the Tax Code does not make the alimony deduction dependent on the provision of the recipient’s Taxpayer Identification Number, so the IRS does not have the authority to deny an alimony deduction during return processing when the payer fails to furnish a valid TIN for the recipient.
“We, therefore, are not able to revise our procedures to deny the alimony deduction if the TIN is not present,” she pointed out. “We have, however, revised our processing instructions to ensure the penalty for failure to provide the recipient TIN is assessed on all applicable returns.”