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November 2019

Expect Greater IRS Focus on Alimony Deduction

By William Stromsem, CPA, J.D., Assistant Professor, George Washington University School of Business


With millions more taxpayers using the higher standard deduction instead of itemizing, IRS auditors may focus more on the reporting of income and deductions going towards adjusted gross income (AGI), particularly alimony. While many “above the line” items are supported by 1099 reporting, there is no 1099 reporting requirement for alimony payments and IRS procedures have been weak in identifying income reporting discrepancies by checking on reported payee taxpayer identification numbers (TINs) provided in the return.

In August, the Treasury Inspector General for Tax Administration (TIGTA) revealed a $3.2 billion tax gap in alimony reporting that has grown since the Tax Cuts and Jobs Act of 2017 (TCJA) changed the law regarding alimony. TIGTA recommends that the IRS modify its compliance strategies to include specific actions, including verifying recipient TINs and assessing penalties when necessary.

Prior to the TCJA, alimony could be deducted by the payor and had to be included in the income of the recipient. The act eliminated both the deduction and the inclusion for divorce or separation decrees executed after 2018 or executed before 2019, but later modified if the modification expressly states that the new law applies. Taxpayer confusion over the prior law may be compounded by this change and even in the past, any confusion seems to have been resolved by taxpayers overwhelmingly on the side of overstating deductions and underreporting income.

As the IRS focuses more on alimony, we need to do so as well to avoid possible taxpayer and return preparer penalties. Taxpayer organizers may have to be beefed up in this area. The organizer should include questions about the recipient, recipient’s Social Security number (SSN) and the amount; the date the divorce or separation instrument was executed; and whether there have been any changes since 2018.

This may take some follow-up questions and education of taxpayers, but the law has changed and taxpayers must comply or risk penalties. 

Late Bonus Depreciation Elections

The Tax Cuts and Jobs Act (TCJA) increased the bonus depreciation deduction for qualified property, now including used property, from the previous 50% to 100% of the cost of the eligible property placed in service in a tax year that included Sept. 28, 2017. This provision begins phasing out after 2022.

The proposed regulations REG-104397-18 implementing this provision were not published until August 2018 after many taxpayers eligible for the additional depreciation had already filed their 2017 returns. Rev. Proc. 2019-33 clarifies that taxpayers can file amended returns to make a late election or file a Form 3115, Application for Change in Accounting Method, for the years the additional deduction was not claimed.