IRS Faulted on Oversight of Adoption Tax Credit

Missing and incomplete documentation for the Adoption Tax Credit prompted the Internal Revenue Service to delay processing 43,295 claims for the credit and approve more than $11 million in erroneous claims, according to a new report.

The report, by the Treasury Inspector General for Tax Administration, also identified 187 taxpayers who claimed the Adoption Credit for a foreign adoption that was not final. The Tax Code states that if an adopted child is not a U.S. citizen or resident, the taxpayer cannot take the Adoption Credit until the adoption becomes final. In addition, TIGTA found that the IRS incorrectly suspended the claims of 333 other taxpayers who had valid Adoption Credit claims totaling $2 million, and their returns were referred to the Examination function.

The Adoption Credit is intended to offset qualified adoption expenses, making adoption possible for families who could not otherwise afford it. The Patient Protection and Affordable Care Act made the Adoption Credit refundable for tax years 2010 and 2011, and the maximum credit amount was increased to $13,170 per adopted child for tax year 2010. TIGTA assessed whether the IRS’s processes ensured the accuracy of Adoption Credit claims for tax returns filed between Jan. 1 and Aug. 6, 2011.

The report acknowledged that the law does not currently provide the IRS with math error authority to deny the credit when there is insufficient documentation to back up claims for the Adoption Credit. While the IRS requires taxpayers to attach documentation to their tax returns supporting Adoption Credit claims, it does not have the authority to deny the credit if the documentation is not provided, the report noted. TIGTA has previously recommended that the IRS request math error authority, which would allow it to deny claims that lack documentation at the time the tax return is processed rather than refer the return to examination, a more lengthy and inefficient process.

The law does not currently provide and the IRS did not seek math error authority for Adoption Credit claims that did not include sufficient documentation, the report found.  As a result, 43,295 (42.6 percent) of the 101,627 total Adoption Credit claims were referred to the IRS’s Examination Function because of incomplete or missing documentation. Of those, TIGTA estimated that 953 tax returns claiming Adoption Credits totaling more than $11 million were erroneous. Math error authority would have allowed the IRS to deny the Credit during the processing of the tax return if required documentation was not provided.

“As we have previously recommended, math error authority would have allowed the IRS a more cost-effective and efficient means of overseeing claims for the Adoption Credit,” said TIGTA Inspector General J. Russell George in a statement. “Those who have valid claims for the credit should promptly receive it, and those who do not should have their claims promptly rejected.”

In its report, TIGTA made three specific recommendations to improve current IRS oversight over the Adoption Credit. IRS management agreed with TIGTA’s recommendations and implemented corrective actions.“Of the small percentage of returns that the Treasury Inspector General for Tax Administration (TIGTA) found not to have been adequately supported by documentation, we will conduct post-refund audits to determine whether the taxpayer was entitled to the credit,” wrote Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division.