Delays in receiving the Adoption Tax Credit refund is probably the most discussed topic this week on every adoption forum or group on the internet.  Creating a Family has been inundated with complaints about delays in receiving the Federal Adoption Tax Credit refund and requests to find out what is happening.  We have attempted to do just that. I will caution that due to the fast approaching tax filing deadline, folks at the IRS are hard to reach and clear information from them is not forthcoming. I do however think we can shed some light for you on what is the current lay of the land for those who are hoping to get an Adoption Tax Credit refund this year and make suggestions if your return is being reviewed. Check out our Top Ten Tips for Avoiding Delays When Filing for the Adoption Tax Credit.

The Health Care Reform bill, which became law on March 22, 2010, changed the Adoption Tax Credit from a standard tax credit (where any taxes you owe are reduced by the amount of the credit) to a refundable tax credit (where you receive the credit in the form a refund regardless how much you owe in taxes).  In other words, a refundable tax credit lets you get a cash refund even if you owe no taxes. CNN Money calls this “the tax equivalent of hitting the jackpot.”   To further fuel the jackpot analogy, it is possible to get this refund for adoptions which took place up to five years ago if previous adoption credits have not been fully used. It may even be possible to get the refund for expenses from a failed domestic adoption.  And if the children you adopted domestically had special needs, you can get the refund even if you did not incur the expenses.  In short, the Adoption Tax Credit is a big darn deal for the adoption community and has certainly promoted adoption.  The purpose of this blog is not an introduction to the Adoption Tax Credit, but you can get more information from the extensive resources on our Adoption Tax Credit page on the Creating a Family website, including an hour long podcast.

Delays in the Adoption Tax Credit in 2011

The IRS is struggling with the Adoption Tax Credit refund this year.  Although the law making it refundable was passed in March of last year, the actual forms for filing did not come out until February of 2011. That’s right, less than two months ago. The IRS has not had much time to train its employees and develop an infrastructure to process this new refundable credit.  Some IRS offices have acknowledged that their personnel have only received training within the last few weeks.  From what I’m hearing, some IRS personnel have not yet been trained and are giving erroneous information.  As long as I’m giving the IRS its due, I should add that the IRS claims that many of the refunds requesting the Adoption Tax Credit are missing required documentation or have errors, and as such should be delayed.

Also, since the adoption credit for adoptions in 2010 is no longer based on a person’s tax liability and since families can go back to capture credit from adoptions as far back as five years ago, many people are requesting huge (or at least substantial) refunds. I have no way of knowing, but it is possible that the IRS had not anticipated these large refunds and is reeling a bit and playing catch up.  Nicole Albrecht, our wonderful adoption tax credit expert, says that delays are not uncommon with other potentially large refundable tax credits for the same reason.  The IRS has acknowledged that “We’re just being very careful because it’s a big chunk of money.

Timeline for IRS Delays

Most adoptive parents trying to claim this adoption tax credit are reporting some variation of this timing.

  • They mail in their return with supporting documentation of their adoption expenses.
  • Some, otherwise known as the “Lucky Few”, report that they have received their full refund, including the adoption tax credit.
  • Most report receiving a letter from the IRS saying that they have received the tax return and it is being reviewed [which in reality is a partial audit].  “Once our review is completed we may send you your refund, ask you for additional information or clarification on items on your return, or deny your refund. If you do not agree with our decision, you will have a chance to appeal.”
  • They later receive a letter from the IRS requesting that within 30 days they send in documentation that they qualify for this credit and that they have actually incurred these expenses. Often parents report that they have already sent this documentation with the original filing.  We have not heard from anyone who received the “you are in review” letter who then received their refund rather than the “we need more information” letter.  However, I have been told that this has happened to a few people working with the Tax Advocacy office (more on them later).
  • At some point, most people receive the part of their refund that is not the adoption tax credit.

From the reports we are getting from adoptive parents, there is no overarching pattern as to who gets through easily and who gets reviewed. Our analysis would make my college statistics teacher apoplectic, but we hope to do better with the results of the survey at the end of this blog.  We have no way of knowing how many Lucky Few are out there, or even if they are few in number.  The vast majority of people who have contacted us are the Unlucky Many who are having their returns reviewed, but that stands to reason since the Lucky Few are content and happy and not likely to contact us just to brag.

For the Unlucky Many , it doesn’t seem to matter whether they adopted domestically or internationally or whether they adopted a child with special needs or not.  It does not seem to matter where people filed their returns, so apparently no one office is more likely to send adoption tax credit returns for review.  Interestingly, it does not seem to matter how large the refund was, which if true, somewhat defeats the “IRS trying to save money” argument.  I have heard from a couple of people who were told by the Tax Advocacy office (more on them later) that the IRS plans to review ALL returns claiming the Adoption Tax Credit at some point, even if refunds had already been sent. I don’t have independent confirmation on this, but it’s worrisome since many people will have already spent their refund.

How Long Will IRS Review for the Adoption Tax Credit Take

Unfortunately, estimates on how long the IRS review will take are all over the board. Let’s start with what the IRS is saying.  On their website, the IRS says to allow 6 weeks after they receive your further documentation for a response. Note that they did not say that they would be finished with their review in 6 weeks, only that they would be back in touch within that time. IRS Publication 552 includes information on tax record keeping and has a section on how to get tax help. The part of this section that deals with checking the status of your refund on Where’s My Refund (located on the IRS website)  says:

Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. If you filed Form 5405, 8379, or 8839 [adoption tax credit] with your return, wait 14 weeks.

We have heard reports from people who say that the IRS has told them over the phone that is will likely be more like 60-90 days due to their backlog.

Tax Credit for Special Needs Adoptions

Adoptive parents of special needs children are allowed the maximum tax credit regardless of their adoption expenses.  The instructions for IRS Form 8839 specify what is considered a special needs adoption.  Keep in mind that approximately 80% of children adopted from foster care will qualify.  Basically, if you are receiving any form of subsidy from the state, your child will likely qualify.  Unfortunately, this does not apply to children with special needs adopted internationally.

We are hearing reports from a few parents that the IRS is requesting proof of their adoption expenses even though their child qualifies as a special need adoption.  Documentation of expenses is not required for domestic special needs adoptions. If this has happened to you, contact the North American Council on Adoptable Children at taxcredit@nacac.org.

What to Do if Your Adoption Tax Credit is Being Reviewed

  • If you received the first letter notifying you that your return is under review, start pulling together all your documents, including proof of payment for all qualified adoption expenses. The Internal Revenue Manual provides the actual guidelines used by IRS auditors when reviewing your return to see if you qualify. It is really helpful to look through section 4.19.15.7 of this manual to see what type of proof they expect to see. You can also check the instruction for Form 8839, for more specifics.
  • Have your documents ready to mail or fax the day you receive the second letter.
  • When you receive the second letter requesting documentation, read it carefully and make sure you send them exactly what they are requesting.
  • Make sure to include the bottom tear-off portion of the notice along with your document.
  • Write your taxpayer identification number on each page of the documentation in case they get separated.
  • Mail to the specific IRS address included with the notice.  You can also fax in your documents, although we’ve heard from some people that the fax number is continually busy. If that is the case, don’t waste time continuing to try. Mail your documents in a manner where you can track their progress.
  • Don’t argue with the IRS that you’ve already sent them this information with the original return.  A different office may be reviewing the adoption tax credit part of your return and your original documentation may have stayed with your return. You may be right that you shouldn’t have to resubmit documentation, but would you rather be right or get your credit refund sooner?
  • Keep copies of everything you send to the IRS.
  • Remember: Getting angry will not help and will give you wrinkles and ulcers—neither of which you need.  Resign yourself that nothing will happen as fast as you want.
  • Choose one of the following mantras to repeat over and over:

o   Good things come to those who wait.

o   Patience is a virtue.

Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps without charge taxpayers who are experiencing economic harm due to not receiving their refund.  They consider economic harm as not being able to provide necessities like housing, transportation, or food.  We have heard from families that have been accepted because they could not afford to pay for therapeutic services for their child with special needs. They will also help taxpayers who believe that the IRS system “is not working as it should”.  You must first try to resolve your problem through normal channels.

If you qualify for TAS help, you’ll be assigned an advocate to help you navigate the IRS system. There is at least one taxpayer advocate in every state. You can find their phone number at  the TAS website www.irs.gov/advocate or call their toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. You can also check out their Facebook page www.facebook.com/YourVoiceAtIRS, or send them a tweet at @YourVoiceAtIRS www.twitter.com/YourVoiceAtIRS.

Help Make the Adoption Tax Credit Permanent

A family should be the birthright of every child.  I firmly believe that adoption is the best option for many children to have a permanent and forever family.  I don’t need to tell you that adoption is expensive—often very expensive, and the Adoption Tax Credit is often the deciding factor in whether or not a family will be able to adopt.  The refundable Adoption Tax Credit will expire Dec. 31, 2011 unless it is renewed by Congress.  There are several bills in Congress right now that would extend the Adoption Tax Credit. Creating a Family will keep you up to date with what is happening on the Adoption Tax Credit and let you know what you can do to support these efforts.  Please sign up for our weekly email newsletter to stay in touch with what is happening. It helps you by keeping you informed of what’s new in the adoption world, and it helps us further of mission of adoption education and support.  You can find the sign up form on the upper left side of this page.  We will never share or sell your email address or name with anyone. Period.

Share your experience in the comment section.  You might also find helpful two subsequent Creating a Family blogs on the Adoption Tax Credit:

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P.S. Creating a Family is not equipped to answer your specific tax questions or give you specific tax advice. You should ask you tax professional questions about your situation since our information is only intended as general information. We do have a terrific tax expert, Nicole Albrecht, who handles questions that come to our Ask the Expert tax credit page.  Needless to say, she is “up to her ears in alligators” right now crunching numbers and filling out forms like crazy, so she won’t be answering any more of your tax questions until after next week. In the meantime, if you have general questions on the Federal Adoption Tax Credit, listen to or download our hour long Dec. 1, 2010 Creating a Family radio show/podcast we did on this topic, check out the Q and A’s on our Adoption Tax Credit Ask the Expert page , and all the resources on our Adoption Tax Credit page.

P.P.S. Check out this fun video of a family that adopted five kids from foster care who found out that due to the Adoption Tax Credit they were going to get a refund of $54,292. Their annual income was around $39,000. I should probably note that I don’t know whether they have received their refund or if they are being reviewed.

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