IRS cracks down on alimony

If you’re paying alimony, you can declare the amount you’ve paid each year on your income tax return and receive a deduction. Similarly, if you receive alimony, you’re required to report the amount you receive during the year on your tax return as income.

Unfortunately, it appears many taxpayers are being less than completely precise when they report these amounts on their returns.

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 for the year 2010, 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 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 is 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 legitimate disagreements and misunderstandings between spouses 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 made payments 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 have any questions about how much alimony you should be reporting – especially if you believe your spouse is reporting a different amount – it would be wise to speak to a family lawyer to make sure you’re handling your taxes correctly. That’s a lot easier than having to straighten things out later with an IRS agent!

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