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I have a client who divorced his wife several years ago. In the divorce settlement he agreed to pay a certain amount of alimony. For several years he has paid this alimony amount and has deducted it on his taxes. Likewise, his ex-wife has (every year) claimed the alimony as a source of income.

Here's where it gets interesting...

Recently, it has come to our attention that the amountf did not match up exactly on last year's return. The IRS looked into it and reviewed the divorce settlement which states that the alimony (and child support) payments cease when their child turns 18.

The IRS is now saying that because the alimony ceases when the child turns 18 they consider all of those alimony payments to be CHILD SUPPORT and therefore (according to them) no alimony deduction.

My client (and his ex-wife) relied on lawyers to draw up this divorce agreement and with the exception of one year, both he and his ex-wife have been consistent with claiming the income and deduction.

If this goes down the way the IRS wants it to he may owe a large amount of money.

Any ideas or suggestions here?

UPDATE:

For clarification. The IRS is saying that because the alimony is contingent upon the child turning 18 their view is that it is NOT alimony but child support. They're looking at ALL years, not just the one.

edited Nov 1 at 18:28

asked Nov 1 at 4:04

TaxQueries♦♦
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Question...only 2008 are they attesting those payments were cs and not alimony or the ENTIRE years? – SandySea Nov 1 at 15:27

Brent Berkman · Answer 1 · 2009-11-01 06:24:43Z UTC

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Excellent question! Before I answer, let's give someone else a chance, but here is a hint.

Please refer to Internal Revenue Code section 71(c)(2).

answered Nov 1 at 6:24

Brent Berkman
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One thing to consider is the alimony was picked up by one as income and one deducted it, so IRS did get a bite at the apple. Doesn't seem worth their time to assess additional tax or audit this. – SandySea Nov 1 at 13:26

Agree, but not having dealt with alimony for a while, I took a quick look at Sec 71. Sec 71(c)(2) indicates that certain reductions related to contingencies involving a child will change the character, or recapture, previously defined alimony as child support upon the occurrence of certain "events", which include attaining a specified age. It appears that legal counsel made an error in the case illustrated in the question. (It's too bad that Lawqueries.com wasn't around for them. BTW, have you registered yet?) – Brent Berkman Nov 1 at 13:53

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Done registering – SandySea Nov 1 at 14:53

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Anyone else going to search out the questions on lawqueries.com? I do have some legal questions but seems the site needs someone to view the questions. – SandySea Nov 1 at 16:46

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Oh my... cat is out of the bag now... Yes, there is a LawQueries.com but we're still working on it. Its not even close to being a polished product... Hopefully in the next week or two... :-) – TaxQueries♦ Nov 1 at 18:26

show 3 more comments

James Houlberg EA · Answer 2 · 2009-11-01 15:10:15Z UTC

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Alimony must be court ordered, since the settlement states it stops at age 18. there is no court order and not deductible.

answered Nov 1 at 15:10

James Houlberg EA
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	welcome here James. But what IRS is trying to do is circumvent the entire alimony payments from inception I think. – SandySea Nov 1 at 15:27
	If it meets the rquirement of divorce decree and the amounts are separtely stated its deductable for years prior to age 18. Just because agent says no, tell agent you disagree and want to go to appeals. The agent is not final word they have to allow any years where requirements are met. – James Houlberg EA Nov 1 at 15:49
	That is what I think the poster meant, but asked them to clarify. – SandySea Nov 1 at 16:38

Helen EA in PA · Answer 3 · 2009-11-01 19:16:24Z UTC

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I have had to send clients to Tax Court re alimony. IRS (RAs, ROs, even appeals) have no idea what to do with alimony. Exactly what does divorce decree say?

Helen, EA in PA

answered Nov 1 at 19:16

Helen EA in PA
1,764●1●4

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Exactly! It is hard to imagine that the attorneys missed something as obvious as Sec 71(c)(2). – Brent Berkman Nov 1 at 21:43

Toni McIntyre CPA · Answer 4 · 2009-11-01 20:45:42Z UTC

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It appears the attorneys should have put a # of years limit on it. That could have caused it to end when the child turned 18 but would not have been contengent on it.
That being said, I agree with James. Take it to appeals. Their whole job is to keep cases from going to tax court. They don't have to have a basis in law for their decisions. I say that based on many year as a Tax Auditor/Tax Compliance officer with IRS.

answered Nov 1 at 20:45

Toni McIntyre CPA
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Except that Section 71(c)(2) is fairly direct and explicit with regards to the recharacterization to child support, I'm not sure what the Tax Court can do. It's up to Congress to fix the legislation. The problem with alimony running for a specified number of years is it may resemble a property settlement and still be nodeductible. It appears that the attorneys simply overlooked the matter for this situation and is why tax, forensic accountants, or EAs should be involved in divorce planning. – Brent Berkman Nov 1 at 21:42

I'm in total agreement with Brent. – Bill Loffredo CPA Nov 5 at 16:14

Phillip Haywood · Answer 5 · 2009-11-02 18:01:22Z UTC

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Alimony cannot be changed based upon a contingent event such as the child turning 18.

answered Nov 2 at 18:01

Phillip Haywood
41●1

	Agreed. That was why I questioned. They CANNOT say all alimony is child support if court ordered – SandySea Nov 2 at 18:28
	If that is true, what does Internal Revenue Code section 71(c)(2) mean? – Brent Berkman Nov 2 at 20:31
	They certainly can say all alimony is child support. The IRS doesn't look at what the payments are called, they look at the circumstances under which the payments were made. – Tom Jun 28 at 17:16

Bill Loffredo CPA · Answer 6 · 2009-11-04 21:10:01Z UTC

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In my opinion based upon the facts in the question this an issue dealing with what the IRS calls " Clearly associated with a contingency" Please refer to IRS Pub 504 page 15. There may still be a fix & overcome the presumption by the IRS if you can show that the period of alimony payments is customary in the local jurisdiction. See what is customary in IRS Pub 504.

answered Nov 4 at 21:10

Bill Loffredo CPA
187●2

Excellent find! The time at which the payments are to be reduced must have been determined independently of any contingencies relating to the children. Fairly tough, unless the period of the alimony payments is customary to the jurisdiction, as you state, which would further relate to a period of time equal to one-half the marriage, etc. and coincidentally happens to be within six months of the child turning 18. Still believe the attorneys messed up. The should have defined it to coincide with some term length of the marriage in the first place. (Future planning tip, all!) – Brent Berkman Nov 4 at 21:29

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Yes, I agree!!! Unfortunately the attorneys messed up!!!! I wonder if they were tax attorneys? That would make it worse!!! Back in the day, we would call this a "Tax Blunder"!!! Tax accountants need to be more involved with their client relating to divorce. – Bill Loffredo CPA Nov 5 at 16:09

Agree! Tax & forensic accountants! – Brent Berkman Nov 15 at 21:00

The suggestion to "show that the period of alimony payments is customary in the local jurisdiction" would make sense if the divorce settlement stated that the alimony would cease after a specific amount of time (for example, a certain number of years). However, since the divorced divorce settlement stating that the payments cease when the child turns 18, this does not apply. – stephenweinstein Jun 28 at 21:52

stephenweinstein · Answer 7 · 2009-11-15 20:39:27Z UTC

Original answer:

The IRS is correct. Payments that must be made only until a child reaches a certain age, and not after that, are child support for federal income tax purposes, even if the divorce document calls them something else.

Follow-up responding to the comment:

If the exception does apply, then go with Bill's answer. Based on the information in the original question, it appears to me that the exception does not apply, but not enough informaiton was provided for me to be certain.

TaxMama · Answer 8 · 2009-11-17 17:01:44Z UTC

One more thought - both the spouses have been treating this as alimony all these years.

One of the key aspects of all contracts is a 'meeting of the minds'.

They both understood the agreement in the same way. The intention of the two spouses was that this payment be alimony.

If the attorneys made an error, it does not change the nature of the understanding or intent.

After all, that's why we look to the Joint Committee's deliberations when we try to clarify tax code. We look for the intent of the legislators.

In this case, we look at the intent of the parties to the contract.

Just my two cents worth.

Best wishes

Eva Rosenberg, MBA, EA

www.taxmama.com Where taxes are fun!

SandySea · Answer 9 · 2010-06-26 21:03:27Z UTC

Suzanne;

Does the divorce decree indicate this? Why is alimony then reduced? I would think the "net" is the same, and someone is trying to skirt the taxation issues with alimony. Divorce decrees signed by a judicial officer are your basis for any claims. If it changes, then in the divorce decree there must be a reson to increase child support and decrease alimony.

I would look at this with a professional and also try to figure out why on earth this changed.

Blaine Stone · Answer 10 · 2010-06-27 19:47:16Z UTC

Yes, a person is legally an adult when they turn 18, so they are no longer a "child". Why is the lawyer on the hook for this again? You should have renegotiated the divorce agreement, if you felt the alimony would be too high when your child turned 18. OR you could say all the "child support" payments made when the individual turned 18 are actually prepaid alimony and should reduce future liability.

IRS claims that alimony is child support

10 Answers