What This Letter Means

Letter 3540 is part of a family of IRS correspondence audit letters about alimony you may have received and did not report as income. The IRS calls the person who received the alimony the "recipient." The person who paid it and claimed the deduction is the "payer."

These cases usually start on the payer's side. The IRS audits the payer's alimony deduction. If the payer proves the payments, and that proof shows alimony income you did not report, the IRS opens a case on your return.

  • Letter 3540-E is the first contact. It tells you the IRS believes you received alimony you did not report. If you dispute the income, it asks for a copy of the divorce or separation instrument and asks you to identify any payers.
  • Letter 3540 or 3540-D comes with Form 4549, an examination report showing the tax change the IRS proposes.

Rules That Matter

  • Alimony must be paid under a divorce or separation instrument: a divorce or separate maintenance decree, a written separation agreement, or a support decree.
  • For instruments executed after December 31, 2018, alimony is not income to the recipient and not deductible by the payer. The same is true for older instruments modified after 2018 to adopt that rule.
  • Child support and property settlements are not alimony.

What to Do

  • Read the amount and the year the IRS is asking about.
  • If you agree, sign the report or pay the amount due.
  • If you disagree, send the instrument, with all amendments, and anything showing the payments were not alimony, were less than claimed, or fall under the post-2018 rules.
  • Respond by the date on the letter. Keep copies and use certified mail.

If You Disagree

The IRS has the burden of proof on income you dispute, and it relies on what the payer provided. Your documents count. If you still disagree after the IRS reviews your reply, you can ask for Appeals review. If you do not respond, the case moves toward a statutory notice of deficiency, and accuracy penalties may be added.

If the IRS says you failed to report alimony, call us at (813) 229-7100.