TIGTA finds $2.3 billion alimony tax gap

The discrepancies between alimony income reported by taxpayers and alimony deductions claimed resulted in $2.3 billion in excess deductions in 2010, the Treasury Inspector General for Tax Administration (TIGTA) reported on Thursday (TIGTA Rep’t No. 2014-40-022 (3/31/14)).

Taxpayers who pay alimony to a former spouse under a divorce or separation decree are allowed to deduct the amount paid from their income; the alimony recipient must report the amount received as income.

TIGTA found that 567,887 taxpayers claimed deductions for alimony paid totaling more than $10 billion in 2010, and for 47% of those returns no alimony income was reported on a corresponding recipient’s return. That amounted to a discrepancy of more than $2.3 billion in deductions claimed with no corresponding income reported.

TIGTA also noted that the IRS does not ensure that taxpayers provide a valid taxpayer identification number (TIN) when claiming an alimony deduction.

TIGTA says that, aside from examining the returns, the IRS has no procedures to fix this tax gap. In fact, TIGTA found that the IRS’s filters exclude returns from examination that may actually represent a high risk of alimony deduction or income noncompliance.

TIGTA recommended that the IRS develop a strategy to address the alimony compliance gap. It also recommended that the IRS’s Small Business/Self-Employed (SB/SE) and Wage and Investment (W&I) divisions work together to evaluate the current examination filters to make sure that potentially high-risk tax returns are not being excluded from examinations. The IRS agreed with this recommendation.

TIGTA also recommended that the IRS revise its procedures to verify that all tax returns claiming an alimony deduction include a valid TIN for the recipient. The IRS disagreed with this recommendation, saying that because it does not have the authority to deny an alimony deduction outside of its deficiency procedures, any validation should be performed in its compliance function.

Finally, TIGTA recommended that the IRS revise its processing instructions to ensure penalties are assessed on returns where an alimony deduction is claimed but no valid recipient TIN is provided. The IRS agreed with this recommendation.

—Alistair M. Nevius (anevius@aicpa.org) is the JofA’s editor-in-chief, tax.