Nearly 70% of Adoption Credit Claims Were Audited by the IRS

Add another item to the list of red flags that may get you audited: Adopting a child.

The Internal Revenue Service mishandled tax returns of adoptive families, flagging for further review 90 percent of those who claimed the adoption tax credit for the 2012 filing season. And a report by the federal agency’s Taxpayer Advocate Service also found that nearly 70 percent of adoptive families — more than 35,000 — had at least a partial audit of their tax return. By contrast, just one percent of all returns are audited.

"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," according to the report.

Unless the IRS alters its approach to refundable credits and incorporates more taxpayer-focused procedures, the federal agency will continue to cause problems for taxpayers, the report continues, including those eligible for the new refundable credit contained in the Patient Protection and Affordable Care Act — also known as “ObamaCare.”

The Adoption Tax Credit was created by Congress in 1996 to encourage adoption and to help offset costs to low- and middle-income families, which are estimated to run as high as $40,000. At the time, lawmakers touted the promotion of adoption as “one of the most important things” to strengthen American families.

But IRS officials selected 69 percent of returns claiming the credit in the 2012 filing season for audit, compared to just 1 percent of all tax returns. The payoff, however, was relatively small, the report found.

“Of the $668.1 million in adoption credit claims in tax year 2011 as a result of adoption credit audits, the IRS only disallowed $11 million — or one and one-half percent — in adoption credit claims,” the report continued. “However, the IRS has also had to pay out $2.1 million in interest in TY 2011 to taxpayers whose refunds were held past the 45-day period allowed by law.”

An IRS official said the agency must make sure claims are accurate. "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," IRS spokeswoman Michelle Eldridge said in a statement to FoxNews.com. "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."

The crux of the problem, according to the report, began in 2010 as part of  the Patient Protection and Affordable Care Act. Congress at that time increased the maximum credit per child to $13,170 and made it fully refundable for the 2010 and 2011 tax years, meaning that even taxpayers who had no tax liability in those years could receive the credit as a refund. That led to a drastic increase in refunds, making more families eligible for larger returns.

In the 2008 tax year, 89,134 taxpayers claimed the adoption tax credit for a total of $354.5 million. By 2010, those figures reached 110,591 and $1.2 billion, respectively. In 2011, 51,539 taxpayers claimed $668.1 million in credits.

The National Taxpayer Advocate recommends, among other things, that the IRS provide examples of acceptable adoption credit documentation for taxpayers, develop a third-party affidavit form for verifying a child’s special needs status and to allow electronic filing of adoption tax credit returns that included substantiation in a digital format.

“The IRS, facing a sizeable refundable credit, reacted with an enforcement strategy that was focused on stopping nearly all returns claiming the credit and subjecting a large percentage of them to an audit, instead of reaching out to stakeholders (including states) to understand the impacted taxpayer population,” the report concludes. “When problems emerged, the IRS simply continued selecting returns for audit. This approach forced taxpayers to withstand lengthy delays and the IRS to expend valuable resources with very little to show for them.”

Read more: http://www.foxnews.com/us/2013/05/24/nearly-70-percent-adoption-credit-claims-were-audited-by-irs-report-finds/#ixzz2UYD2jm4T