Alimony Mis-match Getting IRS Audit Attention

Alimony Mis-match Getting IRS Audit Attention

The U.S. Treasury Department recently released an audit report revealing a disturbing level of non-compliance in alimony reporting on tax returns. This non-compliance will result in vast increase in tax return reviews now and in the years to come. Here is what you need to know. The study The Treasury Inspector General for Tax Administration (TIGTA) recently conducted an Audit of 2010 tax returns that claimed an alimony deduction. What they found: Over 560,000 taxpayers reduced their income for alimony paid in 2010. 47% of the claimed alimony deduction tax returns did not match required income reporting from those who received the alimony. The discrepancy was more than $2.3 billion in unreported 2010 income. Please note: You may reduce your income for qualified alimony payments. Those that receive alimony must include the payments as income on their tax return. As a clarification, in most cases, spousal maintenance is considered alimony by the IRS. While child support is not considered alimony. Further, the audit determined that the IRS does not adequately track this non-compliance, nor are proper penalties being assessed when the person paying alimony does not correctly report the Social Security Number (SSN) or Tax Identification Number (TIN) of the person receiving the funds. Things to consider If you receive alimony. You must report this income on your tax return. If you are receiving income from an ex-spouse that you believe is child support, have documentation to support this claim. Mis-match audits will rise this year. The IRS has corrected their audit filters to capture major alimony mis-matches for the 2013 tax year. Given this, you should expect a notice or audit if there is a major alimony discrepancy. Penalties are coming. If you do not correctly report the SSN or TIN of the person receiving alimony you will now start to see penalty notices. The programming error in the IRS system has been corrected. So get a correct identification number for the person who receives your alimony payments and report it on your tax return. Keep documentation close. Since you know the risk of audit in this area is high, keep your documentation handy. If paying alimony, having it automatically deducted from your paycheck will help you accurately report your payment amounts. File a tax return. In 2010, $937.2 million of the claimed alimony deductions had no corresponding income tax returns filed reporting the income. This non-reporting area is a highly recommended audit target for the IRS. Talk to your ex. While possibly an unpleasant task, a quick discussion regarding claimed alimony can identify whether you have a reporting problem. Hopefully, this communication can solve any potential problems prior to the involvement of the IRS. Source: TIGTA 2014-09 report released 5/15/2014

Indirect IRA Rollovers. Change is Coming

154 E. Boston Post Road | Mamaroneck, NY 10543 | (914) 253-6857 | | www.jpalcpa.com | joe@jpalcpa.com

Indirect IRA Rollovers. Change is Coming Category: Miscellaneous

Topline: When rolling over funds from one IRA to another (typically Traditional IRAs, Roth IRAs, SEP IRAs and Simple IRAs), it is best to use a direct rollover versus an indirect rollover. As confirmed in a recent tax court ruling, taxpayers are limited to ONE INDIRECT rollover per 12 months. This limit applies no matter how many IRA accounts you own. Background Many taxpayers have numerous Individual Retirement Accounts (IRAs). You can move funds from one qualifying account to another without paying taxes on the rollover as long as you follow the rollover rules. If the rules are not followed, the funds are deemed a distribution and taxes plus a potential early withdrawal penalty may be owed. There are two primary methods for rolling over the funds from one account to another: Direct Rollover. Using this method, the taxpayer never takes possession of the rollover funds. Instead, one institution transfers the funds out of one account and sends them directly to the institution that has the receiving account. Since the taxpayer never takes possession of the funds, there is little chance the IRS would see the transfer as a distribution. Indirect Rollover. In this case, the funds are withdrawn from the IRA and sent to the account holder. The account holder then deposits the same amount into the new account. As long as the transfer takes place within 60 days, it is a valid transfer and no taxes are owed. The taxpayer bears the burden of proof that the transfer was completed within the required timeframe. Aggregate once per year rule In a recent court case, the IRS put their foot down on unlimited INDIRECT transfers of funds.* In their ruling they stated that a taxpayer is entitled to make one indirect transfer per 12-month period regardless of the number of IRA accounts. Any additional transfers are not valid and will be deemed a distribution from your IRA. Why the rule? Some taxpayers were using a number of rollovers of the same dollar amount from account to account to give themselves a short-term loan. In the tax case, the defendant removed funds from one IRA. He used the money for a couple of months. He then took the same amount from a second IRA and replaced the money originally removed from the first IRA. He then took the same amount from a third IRA to replace the funds in the second IRA. Finally, the last IRA had its funds replaced. Effectively giving him use of the funds for up to 120 days. The court ruling effectively eliminated the ability to make these kinds of transfers. Effective change The court ruling creates a change in the IRA indirect rollover rules beginning on January 1, 2015. Effective that date, you may only conduct one indirect IRA rollover per 12 month period. IRS publications will be revised to reflect this change. Because of this, it is best to employ a direct rollover of funds from one IRA to another using a qualified financial trustee to avoid any potential problems. This ruling does not apply to all conversions and rollovers. Please contact the financial institution receiving the rolled over funds for details on their process to ensure it is handled correctly. *Source: T.C. Memo 2014-21 Bobrow vs Commissioner IRS