TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Highlights

ADDITIONAL ACTIONS ARE NEEDED TO REDUCE ALIMONY REPORTING DISCREPANCIES ON INCOME TAX RETURNS

Final Report issued on August 7, 2019

Highlights of Reference Number:† 2019-40-048 to the Commissioner of Internal Revenue.

IMPACT ON TAXPAYERS

Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument.† The Tax Cuts and Jobs Act of 2017 repealed the deduction for alimony as well as the requirement to report alimony payments received as income for any divorce or separation instrument executed after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.† However, it did not repeal the deduction and income reporting requirement for individuals who pay or receive alimony in accordance with agreements executed prior to January 1, 2019. In Tax Year 2016, 569,978 tax returns claimed alimony deductions that totaled more than $12.9 billion.

WHY TIGTA DID THE AUDIT

This audit was initiated to evaluate the IRSís use of systemic processes to identify and address alimony income reporting discrepancies.† An alimony income reporting discrepancy occurs when individuals claim deductions for alimony that they did not pay or individuals do not report alimony income they received.† This could result in taxpayers paying less tax than owed.

WHAT TIGTA FOUND

Apart from examining a small number of tax returns involving alimony, the IRS has yet to adequately address the substantial compliance gap that results from alimony income reporting discrepancies.† TIGTA analyzed Tax Year 2016 tax returns with an alimony deduction processed as of February 8, 2018, and found that alimony income reporting discrepancies increased 38 percent from $2.3 billion in Tax Year 2010 to more than $3.2 billion in Tax Year 2016.

Although the IRS identifies both electronically filed and paper tax returns with a missing or incomplete Taxpayer Identification Number (TIN), the processes still do not ensure that all individuals who claim an alimony deduction provide a valid TIN of the recipient as required.† Our analysis of the 569,978 Tax Year 2016 tax returns with an alimony deduction claim identified 2,168 tax returns that claimed more than $38.5 million in alimony deductions in which the recipient TIN was invalid and the IRS allowed the deduction.

In addition, penalties are not being assessed when valid recipient TINs are not provided.† Our review of the 2,168 tax returns in which the recipient TIN was invalid found that the IRS assessed penalties on only 66 tax returns (3 percent) totaling $3,300.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the Commissioner, Small Business/Self-Employed Division, modify the IRSís existing compliance strategy to include specific actions to be taken to reduce the billions of dollars associated with alimony reporting discrepancies.  The Commissioner, Wage and Investment Division, should validate alimony recipient TINs and reject electronically filed tax returns with TINs identified as not being issued by the Social Security Administration or the IRS.† The IRS should also modify Error Resolution System programming to send tax returns that contain an invalid recipient TIN to the Error Resolution function for review, correspondence with the taxpayer, and assessment of the penalty when necessary.

IRS management agreed with three of the four recommendations and partially agreed with the other recommendation.† The IRS plans to monitor and revise alimony selection filters as needed, request programming to verify the alimony recipient TIN was issued by the Social Security Administration or the IRS, and modify programming to send all tax returns with an invalid recipient TIN to the Error Resolution Function.† However, the IRS does not believe corresponding with taxpayers for a valid alimony recipientís TIN is a prudent use of its resources.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

https://www.treasury.gov/tigta/auditreports/2019reports/201940048fr.pdf.

 

Phone Number ††/† 202-622-6500

E-mail Address †/TIGTACommunications@tigta.treas.gov

Website†††††† ††††††/https://www.treasury.gov/tigta