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Added adoption credit scrutiny

By Kay Bell ·
Thursday, June 2, 2011
Posted: 2 pm ET

Raising kids is expensive, so lawmakers have provided a variety of tax breaks for parents.

One of the best tax benefits applies to families that adopt children, especially thanks to recent changes to the adoption tax credit. Not only has the dollar amount of the tax benefit been increased, the credit is now refundable. That means that if taxpayers claiming the adoption credit don't owe any tax, they'll get the excess credit amount back as a tax refund.

Previously, an adoptive parent was allowed to carry any excess nonrefundable credit into the next five tax years or until the amount was used, whichever came first. This past filing season, though, taxpayers could carryover all of their prior-year unused adoption credit amounts to their 2010 tax returns.

That meant that some filers were able to claim big refunds for adopting kids. Media reports recently have spotlighted some of these families, which have claimed tax refunds as large as $67,000.

But many of those taxpayers awaiting five-figure tax refunds thanks to the adoption tax credit haven't yet received their checks from the Internal Revenue Service.

The reason? The IRS is taking a long look at such large claims.

The Treasury Inspector General for Tax Administration, or TIGTA, reports that through April, the IRS had received returns from 72,656 taxpayers who claimed more than $897 million in adoption credits. More than half of those claims were sent for further review, says TIGTA, and will be audited to verify that proper documentation was submitted and that the amount of money being claimed is correct.

The families are understandably upset about the delay, but the IRS is just doing its job.

When the adoption tax credit change to refundable status took effect, the IRS realized that it could receive erroneous claims in connection with the credit. To head off problems, the IRS required filers to detail their qualified adoption expenses on Form 8839, as well as include adoption-related documents with their tax returns to substantiate their tax credit claim.

This documentation meant that the 2010 returns had to be filed by paper rather than electronically. And that, as we all know, slows down the processing of the returns.

Add that processing time to the closer examination of refundable adoption tax credit claims, and the delay is not surprising. It's also paying off.

As of March 4, according to TIGTA, the IRS had received almost 10,000 returns claiming more than $124 million in adoption credit refunds. Almost 7,000 of those claims, or 71 percent, had either invalid, insufficient or missing documentation to support the legitimacy of the claims.

IRS diligence in checking these filings might not please the parents who are waiting for their big refunds, but it makes the rest of us taxpayers, who otherwise would have to cover improperly issued IRS checks, very happy.

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July 29, 2011 at 1:20 pm

I am on my 4th "30" day letter. I filed February 18th with all of the sufficient needed documents. At the end of April I am asked by letter to resubmit what I already did. Just like clockwork that letter will show up again August 4th saying another 30 days. I am sorry that our "windfall" upsets people, we didn't even know about the credit becoming a refund until our tax lady told us. We have 4 state adoptive children who all have autism. There is no method to the madness though because some people got their refunds right away. They are paying interest on the refunds.

July 16, 2011 at 8:58 pm

I too have been waiting for my adoption credit. I filed an amended return on 2/8/11 and it went to a different dept. When I called of course none of the supporting documents were with it. I faxed court papers and subsidary and they recorded it on 4/26/11. Every time I call I get the same thing. They are working on first come. However, last week I became priorty. What dose that even mean ? My case has not even been opened according to the IRS. This is so frustrating.

June 28, 2011 at 11:05 am

While I agree that there needs to be some scrutiny over the large amount of money going out in these refunds the way this is being handled is ridiculous. I filed in March with all of the paperwork they asked for. I was asked for duplicate info in May because they said that it got forwarded to a new office, but they never forward the extra documentation so it needs to be submitted again. After submitting again I was told to wait 30 days which I did patiently and without complaint. Now I receive a letter saying they need 45 more days due to a backlog. So, what keeps them from doing this again in 45 days!! And, I was told that after that decision it would still take 6-8 weeks to get my refund! I don't mind some scrutiny but I am struggling financially as my children were adopted due to a family misfortune not years of planning for children. My family needs this money to survive and waiting this long is hurting us all.

Q Kinnison
June 25, 2011 at 12:10 am

It seems there are several misstatements, unintentional I am sure, in your article. First, there was no prior information from the IRS that additional documentation not required in the years past for the same credit (a roll-over credit at the time) would now be required. It was not until after we had filed that such information was given out. To imply that 70+ percent had insufficient, invalid or missing documentation, implies that the documentation was not available or that there was an intent to deceive when it had not been clearly communicated that such documentation was now needed (it had not been required when the credit was a roll-over credit, which is itself confusing as it still was worth 12-13K over the course of the 5 years; the IRS is okay with people ripping them off slowly, but not quickly?). It is an disservice to both the individual persons who prepare their own taxes and the professional tax-preparers who were equally caught off guard by this late information. Second, you omit the fact that the form 8839 was delayed in getting into the hands of tax filers/preparers. This pushed many of us back a month or more in filing, in addition to the fact that we now had to apply by paper. Third, you also fail to mention that the IRS was laying off people during the same time-frame it was receiving 70K+ returns requesting this particular credit. I am not sure I blame the IRS for this problem as much as I blame Congress for changing the code and cutting budgets. Still, it is disturbing that you choose to place the blame on taxpayers who are upset that the IRS is taking an interest free loan of money that according to Federal Law (tax code) is owed to the taxpayers who have provided all paperwork requested months ago (after they clarified what they would need).

June 23, 2011 at 1:27 pm

What I don't understand is why the IRS won't just issue the refunds and then audit later. They do this now - for example, with the Earned Income Credit. Why don't they put all those returns in review as well, and make everyone prove that their children are real? It's just ridiculous. Just because the refunds are large does not mean that we should all just have to sit around for a year waiting for the IRS to get on the ball. Some of us paid out the rear to get these kids and many were taken off the hands of the state, and ultimately, the taxpayer, and these refunds are tiny in comparison to what the taxpayer would have paid if the children stayed in the system indefinitely. Not to mention that the kids get to have families, which is priceless. Hmph.

June 18, 2011 at 3:12 am

You know nothing of what you talk about. Do you realize that people that adopt special needs in the US that pay very little in fees get the whole 13K credit, no receipts needed. Anyone who adopted a foreign child must prove every cent they spent. This smacks of discrimination in every way. I really don't think this was the intent of the credit, and someone is on a power trip about this whole thing and is harassing adoptive parents. Oh - one more thing, exactly how many children have YOU adopted?