Added adoption credit scrutiny

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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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