Background on the Adoption Tax Credit 2011

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.

Delays in the Adoption Tax Credit in 2011

Adoption Tax Credit is now flagged for automatic review

There are a lucky few who have received their adoption tax credit. However, as a late (July 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.

June 30, 2011According to various calls to the IRS the Adoption Tax Credit falls into Category A for automatic review. It will take between 12 - 16 weeks for your claim to be reviewed and processed. So if they are being automatically reviewed what documentation should you have ready?

Audit / Review Documentation Required

The language below can be found at http://www.irs.gov/individuals/article/0,,id=231663,00.html

Q.13 What audit documentation is necessary for special needs adoptions?

A. If you are claiming the credit for a finalized special needs final adoption, you must submit the final adoption order or decree, and the state's determination of the child's special needs. You are not required to prove you paid any expenses in connection with the adoption.

You will need to send in a state court adoption certificate, order, judgment, or final decree showing the names of the adoptive child and parent and signed by a representative of the state court under seal. Also include documentation from the state establishing that the child has been determined to have special needs. Acceptable documentation of the state's determination of special needs includes (but is not limited to) any of the following:

An adoption assistance or subsidy agreement issued by the state or county
Certification from the state or county child welfare agency verifying that the child is approved to receive adoption assistance
Certification from the state or county child welfare agency verifying that the child has special needs

If the IRS tells you that the adoption subsidy agreement is not acceptable documentation or that they need you to document expenses, you may want to include this link/language in your response to the IRS.

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.

What does the Future hold for the Adoption Tax Credit?

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. 80% of children adopted through Foster Adoption qualify for the Adoption Tax Credit 2011

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