Adoption Tax Credit Update
It’s been two months since tax day, so I thought I’d recap the current status of what is happening with the Adoption Tax Credit. First a quick bit of tax history to get everyone up to speed. Governments have long used tax incentives to encourage “socially-valued” activities (think: education, charitable contributions, etc.), but the vast majority of these incentives are in the form of tax deductions rather than tax credits. A deduction is quite useful, since it lowers the amount of income you have to pay taxes on, but a deduction doesn’t hold a candle to a tax credit, which is taken directly off of any taxes you owe. Quite rightly, in my humble opinion, the government has deemed adoption worthy of encouragement in the form of a tax credit.
The Adoption Tax Credit is refundable, which is important.
In past years the federal Adoption Tax Credit was a simple tax credit where adoptive parents could lower the amount of taxes they owed by the amount of the credit. Although helpful, some families never were able to take full advantage of the credit if the amount of the credit was greater than the amount of taxes they owed, even though they could carry over the credit for five years. For 2011 and 2012, the Adoption Tax Credit became a refundable tax credit, which is better—much better—since the government will pay the family the credit amount rather than lowering their tax bill for the amount of the credit, regardless of how much they owed in taxes or even whether they owed any taxes.
Was the IRS unprepared by the amount of people who claimed the Adoption Tax Credit?
Needless to say, this credit has been very popular. So popular, in fact, that the IRS seems to have been overwhelmed with tax returns claiming the credit and by the amount of some of these refunds, especially for families that have adopted a number of children, and have carry over credit from the past 5 years. I have not found any written confirmation that the IRS was taken unawares by the amounts of the refunds requested, but I suspect that they were. For those of you who have not filed yet or will be filing for the adoption tax credit on next year’s taxes, check out our Top Ten Tips for Avoiding Delays When Filing for the Adoption Tax Credit.
For the reporting period ending April 31, 2011, IRS has received 72,656. returns claiming over $897 million in adoption tax refundable credits. The IRS claims that 58% of the returns with a claim for this credit have been sent for review due to having invalid, insufficient, or missing documentation to support the legitimacy of these claims. From our informal and totally nonscientific survey, I’d say that the percentage of audited returns is far greater. The Creating a Family adoption tax expert, Nicole Albrecht, told me that “every single adoption credit refund that I’ve seen has been held up at the IRS and audited.” Quite a few people, although not the majority, have said that the documentation requested had already been sent when their returns were first filed. Another example of the IRS not being prepared for this refundable credit is that their regulations/guidelines on what type of documentation would be required were late and vague.
Why is it taking so long?
Although I’m really sorry for those who are waiting, and I know this won’t be a popular statement, but I understand the IRS’s position. These are huge (OK, not Iraq war huge or nuclear regulatory huge, but not chump change either) amounts of money we’re talking about. And this money is not just money “lost” through taxes not paid, but money that the government must cut a check for. And although many of us get a check from the IRS for our tax refund each year, that is money that we overpaid to the IRS through withholdings, so in essence with the typical check from the IRS, they are giving us our own money back.
IRS spokesman Terry Lemons said, “We recognize what an important credit this is for people who are adopting, since the dollar figure on this one compared to other refundable credits is very large, but we have people who are trying to game the system all the time, so we’re kind of stuck in the middle — we know parents are counting on this money, but we’re also trying to make sure each claim truly qualifies.” This is, after all, their job.
I truly hope that the returns start speeding up soon. For suggestions on what you can do if your return is being audited, read Delays in Receiving the Adoption Tax Credit–What You Can Do. Most important, we need to gear up to insure that this credit continues in the future. Creating a Family will be keeping our community up to date on legislation to extend the credit, so sign up for our weekly newsletter on the top left of this page.
Image credit: GenBug