Notes from the field: Are you failing to report your alimony payments?

By Guest Blogger Don Paris, CPA, MST, CDFA.

So, do you know one of the easiest ways to get the IRS to review your tax return? Not report the alimony that you received. This one is so easy for the IRS to find. That’s because the payor spouse is supposed to show on their tax return who they paid the alimony to, as well as report the recipient Social Security number. That way, all the computers need to do is match the amount deducted against the recipient Form 1040. If the amount is missing or different, they send a letter with a bill for the tax due as well as assess penalties and interest. If this is the only thing missing from your return, you may not hear from them again. But, if you have other issues, you may get a letter that they want to audit your return. Actually, this issue exists whether it is alimony or some other income you may receive, like dividends, interest, or other compensation.

Treasury Inspector General for Tax Administration (TIGTA), analyzed almost 568,000 tax returns from the year 2010 with an alimony claim. Believe it or not, 266,000 (47%) of the returns had either no alimony income or an amount that was different from the amount deducted. That discrepancy was more than $2.3 billion in deductions without corresponding income reported. This is why we now have the reporting requirements that we do.

Alimony is a payment to or for a spouse or former spouse under a divorce or separation agreement. In that agreement, you will agree what the tax ramifications of alimony are. You will agree that it will either be deducted by the payor and included in income of the recipient, or not deducted/not included. Individuals who pay alimony can deduct the amount paid from income on their tax returns to reduce the amount of tax the must pay. Conversely, individuals who receive alimony must claim the amount received on their tax return, if you have agreed to that treatment in your agreement. Note some of the subtleties here, i.e. first, there must be a written agreement, and that the recipient who agrees to include it in income must do so, but the payor spouse is not required to deduct it. There is no requirement to deduct an item, but you are required to report all taxable income.

Now, before you think you can bypass the filing requirements and avoid all of this, note that the IRS will reject an e-filed return that claims an alimony deduction without the recipient Social Security number. If you file in paper and do not provide this information, expect a letter asking for it.

So, what is the bottom line? If you have agreed in writing that you will deduct alimony, include it as a deduction and provide the Social Security number of the receiving spouse you paid in that calendar year.  If you agreed to include alimony as income, claim the amount you received in that calendar year. In 9 times out of 10, you will be done with your tax reporting and filing requirements. Any other course is subject to peril.

As always, we remind our readers to consult with a financial or tax advisor if you have any questions or further interest in learning about the issues discussed on this blog