Thursday, December 6, 2007

California Alimony Audit Project

he FTB is launching a new audit project to examine alimony payments deducted or received by California personal income taxpayers. The alimony audit project was initiated by a pilot study that indicated a 40% noncompliance rate, affecting multiple years in most cases.

Under federal law as incorporated by California, alimony payments are only deductible by the payer spouse if they are taxable to the recipient spouse. If the divorce or separation agreement designates such payments as not includable in the recipient's income, then the ex-spouse making the payments cannot deduct them. For example, property settlements are not includable as alimony income and are not deductible.

The FTB's analysis indicates that many taxpayers mistakenly consider all payments, including child support payments, made to their ex-spouses as deductible alimony payments. Conversely, many alimony recipients do not consider the payments from their ex-spouses as taxable income, and do not report it. Frequently, taxpayers fail to report income designated as "family support" by the divorce decree even though this type of support is considered taxable alimony income in most cases.

Under the new audit program, the FTB will mail a "Tax Liability Discrepancy" letter to the taxpayer if the FTB feels an audit adjustment is required rather than conducting a complete and time-consuming audit. If the taxpayer agrees with the FTB's audit determination, the taxpayer can pay the tax and interest, and be finished with the process. If the taxpayer disagrees, the FTB will request substantiation from the taxpayer supporting the taxpayer's position. The FTB will be developing a Frequently Asked Questions (FAQ) brochure, which will be included in the letters sent to taxpayers with alimony issues to help taxpayers understand the tax implications regarding alimony payments, as well as address penalties that may be imposed.

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