Extra Scrutiny Delays Refunds for Adoption Credits

June 27, 2011 by  Filed under: Taxes 

Families that adopt children incur a lot of costs in the complicated processes of adoption. However, the government does provide some help with these costs. Taxpayers can claim a tax credit against the costs of adopting children. Better still, some changes made to this credit in 2010 make the credit even more favorable to those who adopt children.

2010 Changes to the Adoption Credit

Prior to the 2010 tax year, the adoption credit was a traditional tax credit. This means that the taxpayers could only apply the credit against their existing tax liabilities. If the amount of the credit exceeded the taxed that owed, the taxpayer’s remaining credit balance would carry forward to the next 5 tax years or until the credit was exhausted, whichever came first. The maximum amount of the tax credit you would be able to claim on an adopted child was $12,150.00 for the 2009 tax year. However, the tax law adjusted the rules of the adoption credit to make it more favorable for parents who had adopted children. From tax year 2010, the credit was adjusted from a traditional credit to a refundable credit. This means that taxpayers claiming the credit can now receive a refund check for any outstanding credit that is not used up by other tax liabilities. In other words, a taxpayer with no tax liability can cash the credit on the same year that he or she makes a claim. Better still, a taxpayer can receive a refund check for any credit that remained outstanding over the previous 5 years. The 2010 adoption credit cap was also raised to $13,170.00 per child.

Figures Pertaining to the Adoption Credit for Tax Year 2010

The changes to the adoption credit have meant that taxpayers who have adopted children and who have outstanding unclaimed expenses can now claim huge refund checks from the IRS. Parents with multiple adoptions can make claims for each child. This has led to high credit claims for the tax year 2010. According to the Treasury Inspector General for Tax Administration (TIGTA), there were 72,656 taxpayers who had made claim to this credit. The value of the credit being claimed was $897 million in total. This means that on average, a taxpayer with an adoption credit claim will receive a refund check of over $12,000.00.

Erroneous Claims

Taxpayers claiming the adoption credit for 2010 were required to file a paper tax return. They were also expected to file Form 8839 detailing the expenses relating to the adoption being claimed. They were also required to attach support documentation for every expense claimed pertaining to the adoption. However, according to the IRS, many of the taxpayers with a claim either missed including the support documentation or erroneously claimed the credit. TIGTA reported that as of March 4, 10,000 returns had been received with the adoption credit claim and about 7,000 of them (70%) either had insufficient documentation or submitted the claim erroneously.

Delays in Refunds

Due to the excessive errors in the adoption credit claims, the IRS is applying extra precaution on these returns, which has slowed down the process of reviewing and distributing the refund checks. As of June 2010, a majority of those expecting a refund check from the credit had yet to receive it. However, though the parents awaiting the checks must be frustrated, taxpayers should be glad that extra scrutiny is being applied. Otherwise, lots of taxpayers’ funds could have been lost through erroneous claims.

Rob L Daniel and partners of Limon Whitaker & Morgan, for years have helped businesses and individuals Nationwide, with their delinquent IRS & State tax problems. The firm is based in Los Angeles, California USA. http://www.limonwhitaker.com / Tel:888.321.6188

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