Adoption Credit Claims Often Auditing Targets

The Internal Revenue Service is currently under fire for its extra scrutiny of the tax-exempt applications of various conservative groups. However, this is not the only current controversy around IRS activity. Many of those who claimed an adoption credit for 2012 were targeted for audits, but after the audits were complete, the agency only disallowed less than two percent of the credits. This shows that widespread adoption credit fraud is not a realistic concern, but it also sheds light on some of the problems within the agency. Each IRS audit delayed tax refunds and forced taxpayers who had claimed the credits to find the supporting documentation necessary to defend their claims.

The IRS allows adoptive families to claim an adoption credit of up to $12,650 per child. People who claim this credit must submit a form documenting their qualified adoption expenses. Unlike many other tax forms, taxpayers cannot file this form electronically; rather, they must mail their completed forms to the IRS. When taxpayers attempt to claim this credit, they may also be asked to provide supporting tax documentation, so it is important to advise your accounting clients to save all receipts, invoices, and documents related to the adoption.

Of the taxpayers who claimed an adoption credit for 2012, 90 percent had their returns flagged for IRS review. Nearly 70 percent were subject to a partial IRS audit of their tax returns. A report by the "Taxpayer Advocate" indicates that the IRS was misguided in its auditing procedures, as these audits revealed very little fraud. This report also calls the approach taken by the IRS "seriously flawed," as it delayed refunds these taxpayers were counting on. Some taxpayers expected to receive large refunds, but the delay in approving the adoption credits left them owing money to the IRS. The agency is now adding interest and penalties to these outstanding amounts, hurting adoptive families even more in the process.

Representative Bill Huizenga and dozens of other representatives are asking the IRS to investigate their auditing procedures to determine if those who claimed the adoption credit were targeted unfairly. The representatives believe this targeting is related to the alleged targeting of conservative groups that applied for tax-exempt status. Tax experts claim that the agency audited so many taxpayers because claiming the adoption credit can result in a very large tax refund. However, other experts say that the agency was just using established auditing procedures to cut down on fraud.

If any of your clients plan to claim an adoption credit for 2013, it is important to discuss the potential implications. Let them know that doing so could trigger an audit or prompt the IRS to flag their returns for review. Ask your clients to retain any documents that support their claims, as doing so could help them take advantage of the adoption credit without delaying their anticipated tax refunds.

(Photo courtesy of Arvind Balaraman / freedigitalphotos.net)