Taxes Blog

Finance Blogs » Taxes Blog » Added adoption credit scrutiny

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.

Make sure you don't miss out on any tax news and tips. Subscribe to Bankrate's free Weekly Tax Tip newsletter.

You also can follow me on Twitter at @taxtweet.

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
June 15, 2011 at 9:58 am

I am in the same boat as most adoptive parents here too! All documentation was sent, received a letter asking for it again, sent that in and was denied because the IRS agent did not read the documentation which specifically stated that my son was special needs determined by the state! To top this off the IRS had prematurely filed a federal tax lien against me because another IRS agent did not check the computer system before signing off on the lien (it was paid 3 weeks prior to the lien being filed!). It was only after successfully (sort of, its still on my credit!) fighting the lien that they denied me the adoption tax credit. I am just wondering if this is the way all veterans are treated in this country. I did not serve 2 years in Iraq, 1 year in Afghanistan and 8 years active Army to have my government treat us citizens like this. I am very disappointed in the govt...

Jerry Stroud
June 13, 2011 at 10:44 am

I used Turbo tax and was surprised by the adoption credit. I adopted 2 children. I submitted all requested court documents and then about a month later they ask for more documents beyond those required to go with the form. They also asked for copies fo receipts. I sen tehm the new birth certificates, court orders, finalities, receipts, credit card statements, airlin ticket recept with used boarding passes, INS application receipts, etc. Got another letter saying they will get back to me in another 30 days of more delays are necessary. This is a matter fo untrained personnel caught in a tax credit that is complicated to them. Like a deer in the headlights of a car, they are frozen in confusion. I expect them ask for more data and tell me they need another 30 days after that.

Ruth Milchak
June 12, 2011 at 5:41 pm

I also am an adoptive parent who is waiting and waiting for the receipt of a refund. I sent everything that was required when paper filing. It was all sent in again, at the request of the IRS. They have sent several "stalling-type" letters since. They were not prepared to provide us the necessary form 8839 in a timely manner, and they did not have reviewers properly trained to process our refunds. All we want is what is legally owed to us. Our children need this.

June 10, 2011 at 10:59 pm

The claim in this article that the 71% of the taxpayers audited did not provide correct or sufficient documentation is erroneous. I am an adoptive parent who participates in several groups. What I have seen and learned personally, is that the correct information was sent with the tax return. The IRS then sends the return to an Examination Department, usually in another city. Only a transcript of the return is sent, none of the documenation. The Examination Department then rejects the return because no documentation is attached. It's been a great misuse of IRS time because the original returns usually have the correct information attached, but that information is being re-requested nearly 100% of the time, sometimes more than once. I imagined they have inundated with paper from the 20 - 40 pages sent with each return and then the additional faxes again at the re-request. My return has always been simple. The complication for 2010 was the adoption credit. I filed on January 24th. It is June 10th, and I am still awaiting a determination.

June 10, 2011 at 3:03 pm

Adoptive Dad & CPA here - I've claimed the credit for myself personally and prepared it for several clients this past tax season. The IRS is providing very poor service on these adoption tax credit refund delays. I've experienced it personally. Suffice it to say, I attached every document they requested to my return - actually attached more than they wanted. Recieved a letter, approximately 60 days after the filing of my return, requesting documentation of the expenses - invoices, cancelled checks, summary of expenses (we need to explain them to them, because they do not know what they are). The letter from them was dated May 13th. The post mark on the envelope was dated May 19th. It was sent from Fresno, CA and I live in Ohio. I received it around May 25th. They said I needed to pull all this information, most of it 1+ year old, and return it to them by June 12th. Banks keep canceled checks online for 3-6 months these days - it takes time to order them. I had a few questions as to what would suffice for documentation and spoke with a completely clueless IRS agent who knew nothing about adoption -- she actually gave me several wrong answers -- things I knew form having so much exposure to the credit. It's an IRS problem, not an adoptive parent problem.

June 09, 2011 at 5:21 pm

It should also be noted that the IRS did not provide FORM 8839 in a timely fashion, as those partents wanting to file for the credit had to wait for the IRS to make several revisions to the form before it was made available. In addition, the IRS asked for specific documenation to be submitted with paper files and, once in receipt of that documentation, sent notices to adoptive parents asking for missing documentation to be submitted. The missing documentation...a second copy of the very forms that were originally submitted. The "71 percent,[that] had either invalid, insufficient or missing documentation to support the legitimacy of the claims," was composed of many individuals who simply provided to the IRS what the IRS required of them. Therefore, your reported numbers, are unfairly skewed. Internally, many of teh IRS' departments had no idea of what other departments were doing. End result, some of the "missing" information was sitting atop someone's desk. This clearly doesn't sound like the fault of honest, hard-working, adoptive parents who've opened their homes and hearts to great bundles of joy. Let us not forget, these very hard-working adoptive parents pay taxes as well and aren't looking for a burdensome windfall. Many are looking foward to the refund to offset the costs of the adoption process itself and, yes, even looking to start 529 college funds. That is, as long as the IRS doesn't doesn't create a paper jam in that process as well.

June 08, 2011 at 9:35 am

Please do some additional research. Much (if not most) of the missing documentation are from the IRS not transfering them betwene departments. A lot of us are cuaght in limbo becuase of government incompetence. Somthing ALL taxpayers should care about!!

Shannon Fields
June 07, 2011 at 2:00 pm

Also some of the improper docuemntation is from an IRS mistake. When they semt my tax return from MO to TX for review they lost the paperwork. I had to resend all the same paperwork. I do not blame the IRS in reviewing but please be honest and say some of the problems is the IRS fault.

jordan k
June 03, 2011 at 6:53 pm

IT is not true that 71% had improper documentation. The truth is the IRS is denying people with valid documentation (subsidy ageements, etc to prove special needs) because they are not educated on what these documents are that they are reviewing. People are wrongly being denied this credit due to IRS error! I know this to be true as it is happening to us currently as well as many friends who have adopted.

June 02, 2011 at 8:24 pm

Wow! As an adoptive parent, your opinion is quite uncalled for. I agree that the IRS should be thorough about the adoption tax credit filers but to add in the snarky comment, "but it makes the rest of us taxpayers, who otherwise would have to cover improperly issued IRS checks, very happy."

Ending your researched posting with the prior line discredits anything you write.