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.
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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