When a married couple gets a divorce, payments of alimony or separate maintenance made by one ex-spouse to the other under a divorce or separation decree are deductible by the paying spouse and taxable income to the receiving spouse. The net result should be no loss of income tax paid to the IRS because of the deduction.
The deduction for alimony paid is an especially valuable “above the line” deduction from gross income that is taken whether or not the paying spouse itemizes his or her personal deductions. The paying spouse reports the amount paid as a deduction on Line 31 (Alimony Paid) on Form 1040. The receiving spouse is supposed to list the total alimony received on Line 11 of Form 1040 and add it to all other taxable income for the year.
However, it appears that huge numbers of ex-spouses who are receiving alimony payments do not report them as income on their returns. The Treasury Inspector General for Tax Administration conducted an analysis of 567,887 2010 tax returns filed by paying spouses that claimed an alimony deduction. It found that there were 266,190 in which it "appears that individuals claimed alimony deductions for which the corresponding income was either not reported on a recipient's tax return or the amount of alimony income reported did not agree with the deduction taken." This resulted in over $2.3 billion in alimony deductions taken without an equal amount of alimony income being reported. The Treasury Inspector General for Tax Administration estimated this resulted in the loss of over $351 million in income taxes for the year. (Treasury Inspector General for Tax Administration (TIGTA) Report 2014-40-022, "Significant Discrepancies Exist Between Alimony Deductions Claimed by Payers and Income Reported by Recipients.")
To put it mildly, this result was a bit of a surprise. Spouses who pay alimony and claim the alimony deduction must include the Social Security number of the receiving spouse on their returns. If they fail to do so, they can be assessed a $50 penalty by the IRS. You would think that having the Social Security number for the spouse receiving the alimony payment should make it easy for the IRS to ensure that these alimony payments are properly reported each year.
You’d might think that, but you’d be wrong. Despite all the computer power and manpower at its disposal, the IRS seems to be a bit of a helpless giant in this regard.
Each year after tax returns are processed, IRS computers match the returns filed by paying spouses claiming alimony deductions with those filed by the receiving spouses. However, the IRS selects for review only those returns in which the alimony deduction claimed is above a certain dollar amount; (for obvious reasons, the exact amount is not disclosed by the IRS). This meant that 77,722 of the 2010 returns containing discrepancies weren't even considered for audit by the IRS. Even if the amount of the alimony deduction was above the dollar amount, the chances of the payor and/or receiving spouse actually getting audited are low. Due to a lack of resources, the IRS selected for audit only 10,870 of the remaining 188,468 returns.
The Treasury Inspector General for Tax Administration has suggested that the IRS revise some of its procedures to prevent this embarrassing state of affairs from continuing. Among other things, this could include sending written notices alerting paying and receiving spouses that IRS computers have spotted potential errors regarding the reporting of alimony payments. The IRS has also promised to step up enforcement of the requirement that paying spouses include receiving spouses’ Social Security numbers on their returns.