Many Texans rank the IRS high on their list of most detested agencies, especially if they have tax issues. Now the IRS may cause difficulty for many more people with its plan to crack down on alimony claims. With a discrepancy of more than $2 billion, many alimony payers are quick to claim the money as a tax deduction, but ex-spouses are not so willing to claim the spousal support as income.
The loss of revenue due to these errors is estimated at $1.7 billion over a period of five years. The IRS is fighting back by adjusting audit filters and scrutinizing returns in which the tax ID of the payee is incorrect – which happens quite often. The IRS reviewed 570,000 tax returns for 2010 and found a $2.3 billion discrepancy. Nearly half of the returns had some sort of error.
The reason for this huge discrepancy could be due to confusion. Child support, for example, is not tax deductible nor is it considered income. Alimony, on the other hand, is tax deductible for the payer but is considered income for the payee. In addition, divorce decrees may cause confusion. The words “alimony” or “spousal support” are not typically used, so it can be unclear whether or not the money paid to the other spouse can be deducted.
It’s important to ensure that tax returns are filed correctly. A divorce can cause confusion due to alimony, child support and other financial elements involved. Those who are confused about the wording in their divorce documents should clarify with the court in order to avoid fines, jail time and other penalties that the IRS could impose.
Source: The Wall Street Journal, “The IRS Cracks Down on Alimony” Laura Saunders, May. 23, 2014