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Internal Revenue Service will be scrutinizing spousal support

| May 30, 2014 | Divorce |

Divorced couples in North Dakota and around the country often disagree on a number of things. According to a new report, too many of them disagree about how much is being paid in alimony, and it’s costing the government money.

This month, the Treasury Inspector General for Tax Administration reported that it found a large gap between the amount of alimony payments people reported as deductions on their tax returns and the amount of alimony reported by the recipient, who is supposed to claim it as income. TIGTA, according to its website, provides “independent oversight of IRS activities.”

In analyzing more than a half-million 2010 tax returns, TIGTA found that the amount of alimony deducted exceeded the amount reported as income by $2.3 billion. This discrepancy, according to TIGTA, could cost the government as much as $1.7 billion over five years. Almost half of returns had a discrepancy in the amount reported by the payer and recipient.

Interestingly, TIGA reported that many of those paying alimony had didn’t even get their ex-spouse’s tax ID number correct on the form. That’s something the IRS says it is working to ensure gets penalized.

Not all of the discrepancies can be chalked up to tax cheats. There’s a lot of confusion and often confusing legal terms around the financial side of divorce. For one thing, spousal support should be reported as income by the recipient, and it is tax deductible for the payer. However, property settlements and child support payments aren’t reportable as deductions or income.

Further, as one accountant noted, sometimes divorce agreements use the term “maintenance” rather than “alimony,” which can lead to confusion. He also says that sometimes a person will pay for something for an ex-spouse that he or she writes off as alimony, while the recipient doesn’t count it as income. He adds, however, “I suspect there’s lots of cheating.”

The IRS says it is devoting more attention to alimony on tax returns. That means that it’s more important than ever for North Dakota taxpayers to work with their legal, financial and tax advisors to ensure that they are accurately reporting any type of transaction with their ex that has a financial value, whether you are the one paying or receiving it. It can save you headaches down the road and possibly significant money in IRS fines and penalties.

Source: The Wall Street Journal, “The IRS Cracks Down on Alimony” Laura Saunders, May. 23, 2014

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