IRS Audited Thousands of Adoptive Families

Another day, another headache for the Internal Revenue Service.

This time, the federal agency is being accused of mishandling the tax returns of adoptive families.

A report from the IRS's Taxpayer Advocate Service says that 90% of families who claimed the adoption tax credit during the 2012 filing season had their returns flagged for further review. Nearly 70%t had at least a partial audit of their tax return.

But the majority of the cases where the tax credit was audited — more than 35,000 returns in all — resulted in no changes.

The Taxpayer Advocate report says the IRS's handling of the adoption tax credit was a essentially a nightmare.

"The IRS's misguided procedures, and its failure to adequately adjust these processes when it learned its approach was seriously flawed, have caused significant economic harm to thousands of families who are selflessly trying to improve the lives of vulnerable children," said the report.

Among those families are Jake and Elfie Dotson of Clarksville. They've been dealing with the IRS for more than a year, trying to finalize their 2011 tax return.

Jake Doston is expecting a refund of several thousand dollars, which will help offset the $11,000 in fees they paid for the adoption. He says that because the IRS hasn't approved the tax credit, the agency claims the Dotsons still owe taxes.

"The IRS is telling me that I owe them money they haven't paid me, plus interest and penalties," he said.

The problem with the tax returns started in 2010, with the passage of the Patient Protection and Affordable Care Act, often known as "Obamacare."

That law changed the way the IRS handled the tax credit for adoptions. It raised the maximum credit to $13,170 per child and made the credit refundable and retroactive. That meant the credit could could boost a family's tax refund by thousands of dollars.

In the past, many families had not qualified for the full credit. But the new rules made more families eligible for larger refunds, said Becky Wilmoth, a registered tax return preparer for Bills Tax Service of Centralia, Ill.

"A lot of people were able to go back and amend their returns from past years," said Wilmoth, who specializes in returns for adoptive families.

The new rules meant the total amount of money refunded jumped fourfold.

For the 2009 tax year, 81,430 taxpayers claimed the adoption tax credit, for a total of $280.6 million. For 2010, 110,591 taxpayers claimed $1.2 billion in credits. In 2011, 51,539 taxpayers claimed $668.1 million in credits.

"I don't think they knew there were that many adoptive families out there," said Wilmoth.

Wilmoth said most families who had trouble with the IRS didn't get a full-blown audit, including interviews with IRS agents. Instead, they got a review of the paperwork for their adoption tax credit. That still causes a lot of anxiety, she said.

But most families eventually got their tax refunds, with interest. According to the IRS report, the median refund for the adoption tax credit was more than $15,000.

"Yes, they had to wait," Wilmoth said. "But you are also talking about a lot of money."

An IRS spokeswoman said that in the past, other refundable tax credits had led to fraud. So the agency was trying to prevent that from occurring with the adoption credit.

"The IRS implemented the adoption credit program with an approach that balanced the objective of paying legitimate credits in a timely manner with that of ensuring that claims were accurate," Michelle L. Eldridge, chief of National IRS Media Relations in a statement.

"Our experiences and lessons learned from other refundable credits taught us that high dollar credits have high risk and the potential for fraud. We must ensure delivery of the credit to those entitled while protecting the government's interest in minimizing exposure to fraud."

News of the adoption audits fueled more online criticism of the IRS. The agency already is under fire after it apologized for targeting Tea Party groups and pro-life groups that had applied for tax exemptions. There does not seem to be any political motive behind the adoption credit audits.

Chuck Johnson, president and CEO of the National Council for Adoption, said he thinks the amount of money involved in the refunds was the issue. He also thinks there were fears that some people might misuse the credit.

That didn't prove to be the case. The IRS disallowed less than 2 percent of the total tax credits claimed, according to the Tax Advocate Service report.

"The good news is that the kind of people who adopt children don't try to cheat on their taxes," said Johnson.

Holly Spann, the Tennessee representative for the American Adoption Congress, said in an email that she was disappointed to see that "such a large number of adoptive parents are going through so much unwarranted analysis by the IRS and having their refunds short-changed...."

Adoptive families who had their tax refunds delayed said that complying with the IRS's requirements was complicated.

David French of Columbia, Tenn., a blogger and lawyer for the American Center for Law and Justice, said that he and his wife, Nancy, filed for the adoption credit in 2011, after adopting their daughter from Ethiopia. Over the summer, they received a letter from the IRS requesting more paperwork, including receipts for their expenses.

They were able to send copies of the receipts for their plane tickets as well as the fees they paid to their adoption agency. But most of their expenses while traveling in Africa were paid in cash.

"Even your hotel doesn't take a credit card in Ethiopia," he said.

Families who adopt from overseas often run up tens of thousands of dollars in debt to pay for the adoption. Getting the tax credit can make it easier for middle-class families to adopt, said French. The median income for taxpayers who got the adoption credit was $64,000.

The adoption tax credit is no longer refundable, which has made it easier for taxpayers who claimed the credit for 2012. Wilmoth said only two of her clients have had their credits reviewed this year.

That may change if the credit becomes refundable in the future. Senators Bob Casey, D-Pa., and Mary Landrieu, D-La., along with Rep. Bruce Braley, D-Iowa, introduced the Adoption Tax Credit Refundability Act of 2013 on Thursday, to make that happen.

Jake Dotson said he'd just like to see his troubles with the IRS be over. He said most people already have a negative view of the agency, because no one likes to pay taxes. The recent controversies have made things worse.

"Nobody trusts them," he said.

Smietana also reports for The Tennessean in Nashville.