In what is called the “alimony reporting compliance gap,” it is estimated that, in 2010, 47% of returns filed by spouses, after a divorce, did not accurately account for alimony in their tax returns. In general, paying spouses would claim they paid more than what the receiving spouse actually received. In addition, it is estimated that approximately 6,500 taxpayers who attempted to deduct alimony payments did not provide the name of the receiving spouse or that spouse’s correct tax identification number. Conversely, receiving spouses would not accurately report the full amount of alimony they were paid. In some instances, a receiving spouse would claim they did not receive alimony at all. On average, this discrepancy amounted to nearly $5,000 per claim.
Some investigators are not satisfied with this and claim a better process needs to be in place. Investigators also report that the government lost over $350 million due to these types of tax returns. Although these statistics are certainly sobering, the IRS does not have the means or the budget to address these concerns. Nonetheless, this may not be a huge problem according to some. The IRS has found that, in general, when taxpayers receive an audit regarding alimony, they will in some cases submit an amended tax return and would usually accurately report alimony in the future.
It just makes sense that those who pay alimony want to deduct it on their tax returns, but, to do so, a few requirements must be met. Each spouse needs to have filed separate tax returns, which may or may not happen for the year in which they initially divorced. The divorce decree must also explicitly state that these payments — which need to be made in cash, money order or check — are alimony.
This may seem confusing to divorced individuals, who only want to do what is fair and right. Fortunately, there are professionals at hand to help explain the intricacies between taxes, alimony and divorce in general.