Alimony Compliance Gap

Post Date: 6/18/14
Last Updated: 6/19/14


Cross References
- TIGTA – 2014-09, May 15, 2014

A report from the Treasury Inspector General for Tax Administration (TIGTA) identifies a $2.3 billion gap between the amount of alimony deductions claimed by taxpayers in 2010 and corresponding income reported.

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.

TIGTA initiated this audit to evaluate whether there is an alimony reporting gap and to assess controls the IRS has in place to promote alimony reporting compliance.

In tax year 2010, 567,887 taxpayers claimed alimony deductions totaling more than $10 billion. TIGTA's analysis of returns with an alimony deduction claim identified 266,190 (47%) tax returns in which it appears that individuals claimed alimony deductions for which income was not reported on a corresponding recipient's tax return or the amount of alimony income reported did not agree with the amount of the deduction taken. This alimony gap totaled more than $2.3 billion.

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.

“The number and size of the alimony reporting discrepancies on federal tax returns is a concern,” said J. Russell George, Treasury Inspector General for Tax Administration. “The IRS should consider the use of less costly processes, including notifying taxpayers of apparent discrepancies, to expand its ability to address the issue,” George added.

IRS processes also do not ensure that individuals provide a valid recipient Taxpayer Identification Number (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.

TIGTA recommended that the IRS evaluate 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.
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