Hundreds of thousands of divorced Americans lie to the IRS every year about their alimony payments, according to a new audit released Thursday that said the falsehood costs the government hundreds of millions of dollars a year.
It’s known as the “alimony reporting compliance gap,” and it’s a problem for the IRS, which doesn’t have a good system for weeding out the false claims, the agency’s inspector general said in the new report.
Alimony paid is tax-deductible, but it must be claimed as income on the recipient’s tax form. But the inspector general said 47 percent of returns filed in 2010 that claimed alimony deductions got the number wrong.
In most of the cases the auditors reviewed, someone claimed to be paying alimony, but the supposed recipient didn’t report it. Other times, the person paying alimony claimed he or she had paid more than the recipient admitted to — for an average of almost $5,000 per claim.
In another 6,500 cases, taxpayers claimed alimony payments but never listed the person they were paying them to, or gave a bogus taxpayer identification number (TIN).
“Apart from examining a small number of tax returns, the IRS generally has no processes or procedures to address this substantial compliance gap,” the auditors said in their report.
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The IRS told investigators it doesn’t have the resources to do a more robust check, but the audit said even merely sending a notice to taxpayers alerting them of a discrepancy can cause some of them to file amendment forms, and pushed most of them to be more accurate in their filing the next year.
The investigators said the government lost out on $351 million in tax payments in 2010 because of bogus alimony claims.
IRS officials disputed that number, saying it couldn’t save that much money because it doesn’t have the ability to audit all of the tax forms.
Investigators also said it should be easy for the IRS to reject alimony payment deductions in cases where the taxpayer didn’t even list a valid recipient. But penalties were assessed against only 20 of the 6,500 tax returns that botched that in 2010.
Initially, the IRS said in December 2012 that it would correct the problem and issue new instructions. But the investigators said those instructions were still wrong, and the IRS revised the instructions in May. Despite that second assurance, however, the auditors said the IRS still wasn’t imposing penalties as of last summer.
The IRS, though, said that it doesn’t have the authority to reject a taxpayer’s alimony deduction claim, and so it didn’t make sense to rewrite its procedures.
The tax code “does not make the alimony deduction dependent on the provision of the recipient’s [taxpayer identification number]. We, therefore, are not able to revise our procedures to deny the alimony deduction if the TIN is not present,” Karen Schiller, commissioner of the IRS’s Small Business division, said in the agency’s official response.