Alimony on your tax return? IRS may be looking at it


 

The IRS has announced areas that will be given extra scrutiny and one area is alimony (both paid and received).  My opinion is the updated IRS computer systems are able to match information between personal returns, like they have been able to with payroll info (W2, 1099 or 1098 forms, etc.).  With this cross-checking of info, discrepancies, such as alimony paid or received would be easier to spot and track.

 

Alimony (sometimes called spousal support) is a payment from one person to another for the maintenance (i.e. living expenses) of the recipient.  By law, alimony is income to the recipient, and a deduction to the payer.  The payer reports the amount of alimony as a deduction to their Total Income to arrive at Adjusted Gross Income (bottom third on the first page on form 1040 – shown below).  The recipient reports the money on line 11 on the form 1040 (Alimony Received).

 

Alimony on tax return

 

Please note this does NOT have anything to do with child support – those payments (for the benefit of any child or children) are not taxable to the recipient nor a deduction for the payer.

 

alimony-iStock_with gavel

So, why the need for extra scrutiny?  Conjecture is the IRS looked at the amount of money claimed by the payer and compared it to the amount claimed by the recipient, and discovered enough discrepancies to warrant extra attention.  I’ve heard of people who’ve accidentally claimed the child support as alimony, and also people who intentionally overstate their payments (payer) or don’t report alimony as income (recipient).  In addition, since individuals are generally calendar year basis taxpayers, if there was a delay in getting a payment between December & January, that could cause a variance.  Whatever the reason, there must be enough of a difference to have the IRS name alimony out as an item to investigate.

 

In the past, I’ve had a client audited who paid alimony, and I brought a copy of divorce decree, year-end pay stub (showing monies being withheld by his employer) and a record from his employer showing payments made to his ex-spouse.  This was more than enough to prove his side – if the IRS looked at the return of the ex-spouse, I have no idea.

 

If you find a letter from the IRS asking for information on alimony, it will probably be a correspondence audit where the IRS is requesting additional information.  Don’t ignore it – try to send the IRS whatever information they ask for.  If you have questions, be sure to contact your tax professional for advice.

 

If you have any questions or comments, including suggestions for other tax topics, please leave them in the contact form below.

 

Cheers!

Thomas C. Hodge, CPA
President

The Hodge Group
3040 N. Menard Avenue
Chicago, IL 60634

773.237.6369

www.thehodgegroup.com

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An IRS Examination Exposes Past Tax Mistakes For A Couple


When I bring a client to an IRS hearing/examination, I always advise the following:

  1. Be polite & respectful
  2. Dress well and look good – no torn jeans, t-shirts, etc.  Suit & tie not required but look tasteful
  3. No overwhelming perfumes or colognes – usually meetings are in a small room or cubicle
  4. Bring water or something to drink – IRS offices tend to be warm & dry
  5. Answer questions directly and stay on topic
  6. Don’t tell stories unless giving background information

The latter 2 items should have been told to one couple who talked too much during an examination.  According to a Tax Court case (Cohen, District Court, N.Y.), a couple’s return was being examined for a particular tax year and hubby was chatting away & mentioned a home sale in the year prior to the audited year.

The couple claimed the home sale was tax free because of the home sale exclusion for principal (primary) residences.

Married taxpayers can exclude up to $500,000 in gains on the sale of a primary residence as long as:

  • They filed a joint return for the year the residence was sold
  • Either spouse owned the home for at least 2 years in the prior 5 years before the date the home was sold (ownership test)
  • Both spouses used the home as their primary residence for at least 2 years in the prior 5 years prior to date of sale (usage test)
  • Neither spouse took the $500,000 exclusion within 2 years prior to the date of sale

For individuals, the same basic tests apply as a sole owner, but the exclusion amount is $250,000.

Going back to the couple in question, even though the prior year wasn’t in question during the audit, the IRS agent decided to expand the audit to cover the prior year.  The agent found out the home was actually rented out to their son and his family for a few years and the couple didn’t actually live in the home and the “usage test” noted above was not satisfieIMG_1012d.

The IRS then issued a correction notice, and the couple appealed stating the IRS shouldn’t have audited that year since that wasn’t in question during the review.  However, the District Court in New York sided with the IRS, and the couple had to pay over $150,000 in tax, penalties and interest.  OUCH!!!

So, remember to only answer what is asked during an IRS examination!

 

Please leave any questions or comments in the form below:

Cheers!

Thomas C. Hodge, CPA
President

The Hodge Group
3040 N. Menard Avenue
Chicago, IL 60634

773.237.6369

www.thehodgegroup.com

Best Tax Preparers Website

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Will My Return Get Audited?

What does the IRS look for an audit of individuals?


Wondering if your personal tax return might get audited?  Do you know what the IRS looks at?

Obviously, the IRS won’t give out a list of items that they look for, but based on audits, here are some known ‘red flags’ (for some items, I have a free brochure – click on the link for the PDF in a new window):

  • Large Hobby Losses – having wage income and a large loss on a Schedule C especially for an activity that sounds like a hobby instead of a business.  See Hobby vs. Business
  • Owning a cash-intensive small business such as hair/nail salons, car washes, taxi/limo service, etc.
  • Claiming 100% business use for a vehicle, especially if it is your only vehicle.  See Business Use of Vehicles
  • Large write-offs of business meals/entertainment or travel on Schedule C or Form 2106  for Unreimbursed Employee Expenses.  Woman Pondering
  • Rental losses for Real Estate Professionals or individuals with large wage (W2) income.  See Rental Income and Expenses
  • Taking larger deductions than your income allows – especially for taxes paid or real estate interest.  Backup documents for these items will probably eliminate any IRS problems.  See Itemized Deductions Homeowners
  • Foreign bank accounts, especially in ‘tax havens’ that don’t disclose account owners. The IRS has made this a high priority for a few years.
  • Operating an S Corp or LLC where you draw a minimal salary.  The IRS has said that owners of these businesses should draw a ‘reasonable’ salary and people have been passing profits through to their individual returns to avoid paying the match on Social Security & Medicare taxes.
  • Using your Home as a Business – people try to write off a lot of items, but only some are allowed.  See Business Use of Home

These are some of the items that have been looked at during audits over the last few years.  As always, keep adequate records to support your deductions.  See Recordkeeping for Tax Purposes.

With the tax season rolling along, you should discuss any issues you many have with your tax preparer.  I’m available if you need help with your taxes, or have any comments or questions.

Cheers!

Thomas C. Hodge, CPA
President

The Hodge Group
3040 N. Menard Avenue
Chicago, IL 60634

773.237.6369

www.thehodgegroup.com

Best Tax Preparers Website

Friend us on FaceBook.
Connect on LinkedIn.