December is the time of year for reflecting on what went right and wrong in the last 12 months and looking to the future for what the coming year will bring. In honor of this week’s Creating a Family show and to answer the hundreds of emails we get on this subject, I thought we’d take a look at the past and future of the adoption tax credit.
What Has Happened With the Adoption Tax Credit this Year?
The Government Accounting Office (GAO) has made our look back fairly easy with their recent report on how the IRS has handled this credit for taxes filed in 2011- ADOPTION TAX CREDIT-IRS Can Reduce Audits and Refund Delays As of August 20, 2011, taxpayers filed just under 100,000 returns, claiming about $1.2 billion in adoption credits. Since the government was being asked to cut a check for a large amount of money, the IRS carefully scrutinized returns claiming this credit. Sixty-eight percent of these returns were sent to what the IRS calls a “correspondence audit”, usually due to a lack of proper documentation. I was somewhat surprised that the figure was so low because we certainly have heard from many people who were being audited. Of course, those who received their credit fast and easy would have had little reason to contact us.
Difficulties with Documentation
In my opinion, the IRS did a particularly poor job letting taxpayers and tax preparers know what documentation to submit in support of the adoption tax credit. We invited the IRS to be on the Creating a Family Adoption Tax Credit show last year, but they declined saying it would be more appropriate to have a private tax preparer speak to these requirements, even though tax preparers knew little more than the rest of us. In truth, I suspect that in December last year, the IRS was aware that they didn’t have the details of what would be required figured out and didn’t want to be put on the spot.
The IRS took some steps to clarify what constituted sufficient documentation throughout the filing season, but again, the burden of finding this information fell to the taxpayer. The GAO report agreed that the IRS needs to do a better job at communicating what documentation would be accepted. The GAO did not address the issue of duplicate document requests and submissions. I have only anecdotal information, but we’ve heard from many people that the documentation they originally submitted with their return was not transferred with their return when it was sent for a correspondence audit. The auditor had to request a resubmission of the same documents in many cases.
The results
Of the tax returns claiming the adoption tax credit that were sent for audit, in only 17% of the returns was the credit not allowed. This compares to 86& of other tax returns sent to correspondence audit for reasons other than the adoption tax credit. In other words, the overwhelming majority of claims for the adoption credit were valid. IRS officials told the GAO that they had not found any fraudulent adoption tax credit claims, and there had been no referrals of adoption tax credit claims to its Criminal Investigation unit. Again, this is not the norm for returns sent to audit.
What can be done to improve the Adoption Tax Credit next year?
Although I know some folks are still awaiting their adoption tax credit, for most, the problems this year are in the past. The question is what can be learned for next year to avoid these long delays and needless expenditure of IRS time and energy. The GAO has made some very specific suggestions, including the very logical suggestion that before sending a return to audit for insufficient documentation, send a letter to the taxpayer requesting the missing documents. I would also add a clearer list of required documents would avoid most of the problems. Taxpayers should review 2011 Form 8839 instructions, which will be available by January or early February 2012, very carefully to be sure that they qualify for the credit and submit proper proof. Creating a Family has extensive resources on the adoption tax credit for adoptive parents to help them claim this credit. We also have a fact sheet for how to avoid delays when filing for the adoption tax credit on your 2011 taxes: Top Ten Tips for Avoiding Delays When Filing for the Adoption Tax Credit.
How will the Adoption Tax Credit change next year?
The more important issue is what will happen to the adoption tax credit in the future. Unless the law changes, 2011 is the last year that the Adoption Tax Credit will be refundable. For 2012, this credit will become a standard credit with the credit being applied against taxes owed. The amount of the credit will decrease slightly as well. For a more thoroughly discussion of what will happen to the adoption tax credit under current law in 2012, 2013, and beyond, check out my blog The Future of the Adoption Tax Credit in 2011, 2012, 2013, & Beyond.
The Adoption Tax Credit promotes adoption. Obviously, this is good for kids and families, but it is also makes good financial sense for our government. The cost of this credit is far less than the cost of keeping kids in foster care or the cost of children being raised by parents who are not able to provide for them. As a group that cares about kids, we need to advocate for keeping this credit and continuing to make it refundable. Creating a Family will be advocating for this and will keep you informed of what is happening and what you can do. Sign up for our weekly newsletter at the top left side of this page. Also, listen to our annual Creating a Family radio show/podcast on the Adoption Tax Credit on Dec. 14, 2011.
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Great Article. Thanks for the info, super helpful. Does anyone know where I can find a blank “2008 NY LS-223” to fill out?
No, sorry.
We filed for the adoption credit after we experienced a failed adoption. Even though we submitted the required documentation(Expenses from our attorney, home-studies expenses, law enforcement clearances expenses, birth-mother expenses, etc), our claim for our failed adoption was denied. The IRS stated that we had to have a birth certificate for the child we attempted to adopt. Since the birth-mother decided to adopt, we were unable to obtain this birth certificate. Our CPA and our adoption attorney are both stumped by this requirement.
It seems that the IRS is doing everything possible to deny claims,even when you have a huge amount of documentation. Something needs to be done about the IRS and it’s non-sense audits of the Adoption Credit.
I have had a major issue, filed beginning of Feb. still waiting, now it is finally in review. We adopted a special needs child and have all the proof. At first they lost the papers, they lost the tax credit form and added more time. It just seems like it is one thing after another. Since it was a special needs child we weren’t required to submit any financial involvement. It just seems like the process could of gone a lot smoother. Why make it so tough when it is clear there was an adoption and clear she has special needs.
So it seems the problems have carried over to 2011 returns. We filed January 3rd. Last week I checked the irs website and it said to expect my refund by March 23rd. I breathed a sigh of relief. Today in the mail I got a letter requesting the exact same documentation I previously submitted saying that out file was under review.
The adoption of our son (who came to us from West Africa) was finalized in his country of birth in 2010. We claimed the expenses for that process on our 2010 tax forms. We were “audited” but received the full credit later in the year.
I’m wondering about people’s experiences in claiming the costs of a RE-ADOPTION in one’s home state. Is this allowed?
Thanks!
Our tax preparer had handled this situation before. She filed our 2010 taxes without the adoption tax credit. The next day she mailed an amended 2010 tax form with the adoption credit. She said that by doing this the amendment with the attached documentation ends up on the correspondence auditors desk. Than the correspondence auditor can view your primary tax return which was entered into the computer. Seems kind of interesting, but we recieved our tax refund in 6 weeks. Another bit of advice, seek social security cards and amended birth certificates early because they take time. States will work with you if you call them and ask them to expedite birth certificates.
Wow, that’s an interesting approach and this is the first that I’ve heard of it. I wonder if others have had this experience. Certainly one of the problems families have faced with taxes filed in 2011 is the requesting of documents that were sent in originally, but never made it to the correspondence auditors desk.
I wish the problems this year were in the past. We adopted our daughter from China in 2008 and had had no problems using the carryforward for the two years prior. That is until this year. First, we only claimed $1500 for the credit this year even though we still had $4400 of carryforward. Before we were audited, as many have, the IRS decided to amend our return and bumped our claim to $8800, without our consent. When documents were requested, we provided her IR-3 visa as well as an itemization of expenses. Following 5 months of waiting we had our tax credit disallowed. To add insult to injury we were penalized 20% of the IRS’s amended $8800 sum to the tune of $1800. Funny, we don’t owe taxes but owe a penalty for accuracy over a credit. It gets better. I submitted all of our receipts and further documentation of our daughter’s adoption by certified mail in September, but alas the IRS has no record of our documentation. So on October 17th we got the great letter Notice of Deficiency and to either pay up or petion the tax court within 90 days or lose all rights. I have tried submitting the documents (40 pages) eight times by fax since then, and guess what, still no record of our documents. What’s really hilarious is that my IRS form 886-A requests a copy of our adoption decree as well as the ORIGINAL document. After certified mail and 8 fax attempts with no receipt, the IRS will never get its hands on any of our original documents. So today I have filed my petition to the tax court. Perhaps thay can do a better job of holding onto documentation.
My wife and I find it ironic that the IRS can claim that the returns that were scrutinized were simply due to a ” ‘correspondence audit’ ” when we sent exactly the same documentation after being notified of the review as we had originally sent with our return when we initially filed it.
It seemed to us that returns claiming the adoption tax credit were being audited routinely without regard to the documentation that had been submitted and that this documentation must not have been kept with the return once it had been received by the IRS.
David, you’re right that the IRS had some internal tracking problems when it came to the documents sent in with returns that were eventually sent for a correspondence audit. I’m hopeful that they’ll have worked out some of the kinks for those folks claiming the credit this year.
Meredith, we also claimed a failed adoption this year and *just* received our refund the day after thanksgiving. We went back and forth with the IRS several times before they approved us. Ultimately we sent a copy of our homestudy, a copy of our invoices, a copy of our agencies policy on refunds for failed placements (basically outlining what we would still be out) and a letter documenting what happened. We did not have a birth certificate either, or, of course any court documents. I know it is frustrating, and I really despaired of ever getting anywhere, especially when it took so long for them to get back to me, but it can be done.
Dawn, thanks so much for all you’ve done w/the tax refund issue. Your website was helpful for us – it helped us expect the audit (it came), know how to answer it (thoroughly, making extra copies for ourselves of everything) and rejoice when our credit (with a bit of interest!) actually finally arrived. We have friends who’ve recently adopted who didn’t even KNOW you could obtain a tax refund rather than just a credit and who didn’t believe us that we would get one until we told them the check had come in the mail. Anyways, this latest info is great too – I like how they found NO fraudulent claims. That sure says something to those who accused us of adopting kids in order to make money (???!!!) and/or that we would claim kids we didn’t actually parent. Thanks for keeping us informed on what we can do to keep the tax refund going on.
Brie, I think it speaks volumes too. I do understand why the IRS wants to be careful, especially with a refundable credit, but I hope they make a few changes with the credit for 2011.