Monday, August 19th, 2019 @ 2:45PM

CFEG researches and reports on waste and mismanagement within the federal government with the goal of educating the public, the Congress and preventing and eliminating it through legislative and program initiatives.

 

In this article CFEG reports on findings set out in a report from the Treasury Inspector General for Tax Administration (TIGTA) dated August 7, 2019 titled, Additional Actions Are Needed to Reduce Alimony Reporting Discrepancies on Income Tax Returns. https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

TIGTA in its report defines alimony as a payment to or for a spouse or former spouse under a divorce or separation instrument. For divorces prior to December 31, 2018, the Internal Revenue Code states that alimony is deductible by the payer and must be included in the spouse’s or former spouse’s income.  https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf Individuals who paid alimony report the amount paid as a deduction on their tax return. They also provide the Taxpayer Identification Number (TIN) of the recipient on their tax return.  Individuals who receive alimony must claim the amount received as income on their tax return.  https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

TIGTA noted that the Tax Cuts and Jobs Act of 2017, signed on December 22, 2017, repealed the deduction for alimony as well as the requirement to report alimony payments received as income for any divorce or separation instrument executed after December 31, 2018. This effective date also applies for any divorce or separation instrument executed on or before December 31, 2018, but modified after that date, if the modifications expressly provide that the new law applies.  However, the Tax Cuts and Jobs Act did not repeal the alimony deduction and income reporting requirement for individuals who pay or receive alimony in accordance with agreements executed prior to January 1, 2019.  https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

Individuals who currently pay alimony as well as individuals who enter into an agreement that requires alimony payments during Calendar Year 2018, can continue to take the deduction. In addition, individuals who currently receive alimony or who begin to receive alimony during Calendar Year 2018 must continue to report alimony as income on their tax returns.  https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

TIGTA issued a report in March 2014, finding that the IRS had not developed processes to address the majority of discrepancies between alimony deductions claimed and income reported. An alimony income reporting discrepancy occurs when individuals claim deductions for alimony that they did not pay and/or individuals do not report alimony income they received. TIGTA found that erroneous deduction claims reduce the amount of income reported and ultimately the tax owed. https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf  TIGTA further found that taxpayers who do not report alimony income are also reducing the amount of tax owed.

 

TIGTA analyzed 567,887 Tax Year 2010 returns with an alimony deduction claim and identified 266,190 or 47% where it appeared that the taxpayers claimed alimony deductions for which income was not reported on the corresponding recipient’s tax return or the amount of alimony income reported did not match the amount of the deduction taken. As a result, there was a discrepancy of more than $2.3 billion in deductions claimed without corresponding income reported. TIGTA found that the IRS had no processes in place to address this substantial compliance gap.  https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

TIGTA also found that the IRS did not have processes in place to ensure that individuals provide a valid recipient TIN as required when they claim an alimony deduction. Of the 567,887 Tax Year 2010 returns that

TIGTA analyzed it found an estimated 6,500 tax returns that claimed an alimony deduction for which the IRS did not identify that the recipient TIN was missing or invalid.  TIGTA also found in its report that due to errors in IRS processing instructions, the IRS did not assess penalties totaling $324,900 on those individuals who did not provide a valid recipient TIN as required. https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

IRS Has Not Taken Adequate Actions to Address More Than $3.2 Billion in Annual Alimony Reporting Discrepancies

 

TIGTA found that the IRS has yet to adequately address the substantial compliance gap that results from alimony income reporting discrepancies since reporting on this issue in March of 2014. https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

TIGTA analyzed 569,978 Tax Year 2016 tax returns with alimony deductions that were processed as of February 8, 2018, and found that 284,053 tax returns reporting alimony income resulted in an alimony income reporting discrepancy totaling more than $3.2 billion. https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf  This amounted to an increase of 38 percent from the $2.3 billion in Tax Year 2010 when TIGTA reported on it in March of 2014. TIGTA also reviewed 232,548 of the 284,053 tax returns with an alimony reporting discrepancy and found they included 175,820 tax returns with discrepancies that totaled more than $1.6 billion. https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf  These returns involved a difference between the amount of alimony deducted and what was reported as income on a tax return associated with the TIN provided by the alimony deduction claimant. TIGTA found that the unreported alimony income resulted in an understated tax liability of more than $248 million on the alimony recipients’ Tax Year 2016 tax returns.  https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf  Based on a prior IRS study which examined tax returns with similar characteristics and determined that 13 percent required no adjustments, TIGTA reduced the number of tax returns to 152,963 tax returns that potentially would have resulted in a tax adjustment of approximately $216 million. TIGTA concluded that over a five-year period this could result in more than $1.1 billion in unreported tax. https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

TIGTA found 54,560 tax returns that claimed approximately $1.5 billion in alimony deductions. However, these involved no associated tax return being filed under the TIN provided by the alimony deduction claimant. TIGTA was therefore unable to compute the tax effect because the recipient tax return was not filed.  https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

TIGTA also found 2,168 tax returns that claimed an alimony deduction of $38.5 million. However, these returns involved deductions for which TIGTA could not determine if the alimony deducted was reported on an associated filed tax return because the TIN provided by the alimony deduction claimant was invalid.   https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf  TIGTA was therefore unable to compute the tax effect because the alimony recipient could not be identified.

 

As part of TIGTA’s audit, IRS management advised TIGTA that the examination of tax returns continues to be the only compliance activity used to address discrepancies between alimony deductions claimed and income reported.  https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

For Fiscal Year 2016, TIGTA found that the IRS selected 7,492 returns with alimony deduction claims for examination and assessed more than $18.5 million in additional tax for 3,461 returns. See the chart below. https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

For Fiscal Year 2018, the IRS selected 6,858 returns for examination and assessed more than $36 million in additional tax for 3,594 returns. The remaining 3,264 returns (47.6 percent) resulted in no tax assessment. https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

The IRS examined 13,594 tax returns in Fiscal Year 2010 and 7,492 tax returns in Fiscal Year 2016. TIGTA identified 266,190 Tax Year 2010 returns and 232,548 Tax Year 2016 returns with an alimony discrepancy. https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

TIGTA concluded that this established that the IRS only audits 5 percent or less of the number of cases identified with a reporting discrepancy.

 

In response, IRS management blamed this on a reduction in the number of full-time examiners since Fiscal Year 2014. The chart below shows that the IRS reduced the number of tax returns examined since 2014. https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

Year          Tax Returns Examined        Dollars Assessed

 

2010         13,594                                   $37,405,687

2011          9,789                                    $30,913,749

2012         13,232                                   $36,699,592

2013         14,659                                   $40,490,720

2014         12,229                                   $29,770,206

2015          8,069                                    $20,320,379

2016          7,492                                    $18,508,797

2017          5,902                                    $58,119,852

2018          6,858                                    $36,178,425

 

TIGTA found that although the IRS identifies both e-filed and paper tax returns with a missing or incomplete recipient TIN, the processes do not ensure that all individuals who claim an alimony deduction provide a valid TIN of the recipient as required. https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf  For example, TIGTA analyzed 569,978 Tax Year 2016 tax returns with an alimony deduction claim and found 2,168 tax returns that claimed more than $38.5 million in alimony deductions where the recipient TIN provided by the alimony deduction claimant was invalid, but the IRS allowed the deduction. https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf

 

In sum, TIGTA found that the IRS has failed to take adequate measures to address more than $3.2 Billion in annual alimony reporting discrepancies.  The failure to address these annual alimony reporting discrepancies has resulted in understated tax liability of more than $248 million for just one year on the alimony recipients’ Tax Year 2016 tax returns. TIGTA concluded that over a five-year period this could result in more than $1.1 billion in unreported tax.  https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf  These errors in the processing of tax returns by the IRS has resulted in the loss of millions of tax dollars for the U.S. Treasury. When the IRS fails to take adequate measures to address alimony reporting discrepancies this constitutes a failure to collect tax revenue through error or neglect and as a result the IRS fails in its mission to apply the tax law with fairness to all.

Posted by cfegov
Categories: IRS Errors In Processing Tax Returns