IRS cracks down on alimony

IRS-alimony-300x277People who pay alimony are allowed to declare it on their income tax return and take a deduction. In the same way, people who receive alimony are required to report the amount they receive on their tax return as income.

But it appears many taxpayers are not being completely accurate when they report these amounts.

A recent government report identified a huge national gap between the alimony deductions claimed by payers and the alimony income claimed by receivers. And as a result, the Internal Revenue Service is cracking down.

The report analyzed nearly 600,000 tax returns involving alimony that were filed recently, and found that reported deductions exceeded reported income by more than $2 billion. In fact, nearly half of all returns in the study showed discrepancies between the amount the payers claimed as a deduction and the amount the recipients claimed to have received.

In addition, a large number of alimony payers didn’t provide a tax ID number for the recipient on their tax return – despite the fact that they’re legally required to do so.

In response, the IRS has announced that it’s changing the way it selects tax returns for audits in order to catch more suspicious returns involving alimony, and it will more thoroughly investigate taxpayers who might be misreporting their payments.

The agency is also planning to increase the penalties for taking an alimony deduction without providing the recipient’s tax ID.

Of course, not everybody who over-reports payments or under-reports receipts is doing so maliciously. A lot of the discrepancies stem from simple misunderstandings about what counts as alimony in the first place.

For instance, alimony is treated differently from child support for tax purposes – there’s no tax deduction for child support payments. But sometimes people combine payments of alimony and child support, and then get mixed up over how much was for each.

There have been cases where spouses have bought items for an ex or paid bills to a third party in lieu of making direct alimony payments. This can create a lot of confusion. There can also be confusion if a spouse falls behind on alimony in one tax year and then makes up the difference in another tax year.

And it’s important to note that the tax deduction for alimony only applies to payments that are legally required under a divorce agreement. If you make a payment to an ex-spouse that isn’t legally necessary, it doesn’t count as “alimony” even if you intended it for his or her support.

If you or someone you know has questions about how much alimony should be reported on a tax return – especially if you believe an ex-spouse is reporting a different amount – it would be wise to ask for advice. That’s a lot easier than having to straighten things out later with an IRS agent!