Study finds massive discrepancy in tax filings leading to $1.7 billion tax gap
Divorce will end a marriage, but it will not end taxes, although quite a few Americans appear to wish it did, according to Forbes. A recent report by the Treasury Inspector General for Tax Administration found that unreported alimony payments had led to a $1.7 billion tax gap for the treasury over five years.
Alimony must be reported
When it comes to alimony, the person paying the alimony is allowed to claim it as a deductible when filing taxes. In turn, the person receiving the alimony is also supposed to claim that alimony on tax forms as income.
TIGTA found that in 2010 there were 567,887 tax returns with an alimony deduction claim made by the person paying the alimony; however, 47 percent of those claims had no matching alimony payment reported by the corresponding recipient.
In effect, hundreds of thousands of Americans may be filing their taxes incorrectly when it comes to alimony payments. TIGTA, however, noted that few of the cases actually lead to serious consequences since the IRS only audits returns when the alimony deduction amount is over a certain limit. TIGTA recommended sending out warning letters to tax filers as a way of making sure alimony is properly reported.
Alimony for tax purposes
As another article in Forbes reports, however, the reason so many Americans are not reporting alimony as income may have more to do with confusion surrounding tax rules than it does with people trying to cheat on their taxes. Forbes says that when an ex-spouse pays another ex-spouse then that income is treated as alimony, child support or property division. The distinction is important since anything considered alimony tends to have serious tax consequences.
The problem, however, is that what ex-spouses consider "alimony" may not be the same as what the IRS deems to be alimony for tax purposes. For example, a separation agreement may state that payments made to an ex-spouse are to be treated as alimony for tax purposes, but if the payments are, in substance, child support or property division then the IRS will treat them as such. For example, alimony that ends upon a child graduating from high school would likely be treated as child support for tax purposes. Understanding the difference is important since it could have an effect on how much can be deducted when filing taxes.
Alimony and divorce law
The issue of alimony and taxes highlights why it is so important for people to have an experienced family lawyer when drawing up a separation agreement. Such a lawyer can help make sure that an agreement includes the proper statements pertaining to alimony for tax purposes so that you are not caught unaware by an inadvertent tax-filing error in the future.