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.

Qualify and Claim the Adoption Tax Credit

Two documents from the US International Revenue Service (IRS) provide information to individuals on how to qualify for and claim the adoption tax credit for certain adoption expenses.

The first document, Adoption Benefits FAQs, explains the adoption credit for tax year 2011, including which expenses are qualified adoption expenses, who is an eligible child, when to claim the credit, which forms to complete, and what supporting documentation is required.  The information was last updated in August 2012, and is available here.

The second document, March 2012 Adoption Credit Phone Forum Questions and Answers, provides further details on when certain expenses are allowable for the adoption credit for tax years 2011, 2012, and 2013.  It also provides the maximum credit amounts and income limitations for those tax years, as well as specific requirements for domestic special needs adoptions and intercountry adoptions.  The information in this document was last updated in October 2012, and is available here.

Most vulnerable casualty of DC tax battle may be orphans, foster kids

By Greg Wilson, FoxNews.com

Amid talk of the “fiscal cliff” and how much wealthier Americans should pay the government, not much attention has been paid to the most vulnerable class of tax code casualties: orphans and foster kids desperately hoping to be placed in loving homes.

But among the so-called Bush tax cuts set to expire at the end of the year is a one-time adoption tax credit that can give families nearly $13,000 in aid for taking in a parentless child. Advocates fear that if the tax credit is not renewed, tens or even hundreds of thousands of kids will be left to fend for themselves.

"Without the tax credit, thousands of parents who could not afford to do adoption would just simply not be able to adopt children," said Bill Blacquiere of Grand Rapids, Mich.,-based Bethany Christian Services.

The tax incentive, first written onto the Internal Revenue Service books in 1997, allows people who want to adopt children but don’t have the financial means to take in kids who might otherwise grow up in foster homes.

According to the National Council for Adoption, there are more than 100,000 children in foster care in the U.S., and millions more orphaned and abandoned children around the world. Cutting the tax credit for adopting these children will mean far fewer find homes, say advocates. The council has started a website, savetheadoptiontaxcredit.com, with the hope of building support for making it a permanent part of the tax code.

While both parties in Washington, as well as the White House, appear to support the adoption tax credit, the standoff over renewing a much broader package of tax cuts could doom it. Democrats want to make renewing the Bush tax cuts contingent on raising income taxes for people earning $250,000, while Republicans are adamantly opposed to anything that raises taxes above current levels.

Unless Congress acts to extend this tax credit, on Jan. 1, 2013, the only credit for adopting will apply to parents who take in special needs children from within the U.S. — and that credit will be for just $6,000.

The adoption tax credit, which adjusts annually for inflation, is $12,650 this year, down $710 from 2011. But what really hurts families with big hearts and tight budgets is that the credit is no longer refundable, according to Bankrate.com. That means it can help lower the tax bill, but once expenses are covered no excess credit can be claimed as a tax refund. That especially hurts poor families who may have little or no tax liability.

The National Council for Adoption wants to not only save the credit, but make it refundable, as it was in 2010 and 2011.

Joe Kroll, executive director of the North American Council on Adoptable Children, cited the case of the case of Todd and Mary Hankel, of St. Croix Fall, Wisc., as an example of how important it can be to be able to claim adoption expenses as a refund and not simply a credit. When seven siblings from a troubled Twin Cities family were put up for adoption in 2006, the Hankels stepped forward to adopt all seven in order to keep the kids together.

They were able to carry forward the tax credit against their expenses — which included building an addition on their house — until 2010, when the tax break became refundable and they got a check that helped them pay off a mortgage for the addition.

The Hankels are not wealthy, said Kroll, and neither are most people who make the decision to take in foster children.

“When you look at the numbers, you see that folks under $100,000 make up the bulk of the adoptions,” Kroll said. “It’s stunning how many families at lower income levels are adopting children.”

That’s why Kroll wishes the heated political debate about the Bush tax cuts did not include an incentive for helping otherwise helpless kids.

“I wish the discussion of all the different taxes did not include this particular tax issue,” Kroll said. “It is support to families that are adopting, and doesn’t belong in the political mix.”