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Alimony and income matching: TIGTA concerned about discrepancy

Divorce is a common experience in modern America.

To be sure, a couple of generations ago it wasn't. But there has been a sociological sea-change on the issue. And as research by a University of Texas professor, Jennifer Glass, has shown, the rate in Texas exceeds the national average.

With so many divorces occurring, a lot of money changes hands in alimony payments. These payments are tax deductible for the person paying them, but are considered taxable income for the recipient.

In this post, we will take note of recent report showing a discrepancy between the amount of alimony income that is supposed to be reported and the amount that is actually reported.

The report was issued by the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA found that in 2010, there were nearly 568,000 tax returns claiming deductions for alimony payments. The amount of the deductions was about $10 billion in alimony payments.

Yet on the revenue side, for those who received alimony payments, the amounts of alimony reported as income often did not match up what was deducted by those paying it.

Indeed, the gap between the two figures - alimony payments claimed in tax deductions and alimony received and reported as income - was $2.3 billion.

The matching that IRS computers are able to do between the two sets of returns is based on Social Security numbers. The person who is claiming an income tax deduction for alimony payments is required to give the Social Security number of the person to whom the payment was made.

It is not always clear, however, what action the IRS may take after its computers detect a discrepancy regarding alimony payments. A computer can flag the issue, but it typically requires some investigation by a human agent to find out what happened.

Source: Forbes, "TIGTA Alimony Report May Cause Crisis of Conscience Among Tax Professionals," Peter J. Reilly, May 19, 2014

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