Adoption Tax Credit: IRS Can Reduce Audits and Refund Delays
GAO-12-98
Published: Oct 20, 2011. Publicly Released: Nov 21, 2011.
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Highlights
The federal adoption tax credit, established in 1996, was amended in 2010. These amendments included making the credit refundable (meaning taxpayers could receive payments in excess of their tax liability) and increasing the maximum allowable credit to $13,170 of qualified adoption expenses for tax year 2010. As of August 20, 2011, taxpayers filed just under 100,000 returns, claiming about $1.2 billion in adoption credits. Following these changes, the Internal Revenue Service (IRS) developed a strategy for processing adoption credit claims. GAO was asked to (1) describe IRS's strategy for ensuring compliance with the adoption credit for the 2011 filing season, (2) assess IRS's related communication with taxpayers and stakeholders, and (3) assess its processing and audit of claims. To conduct its analysis, GAO analyzed IRS data and documents, interviewed IRS officials, observed IRS examiners, and interviewed other stakeholders.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | For the 2012 filing season, the Commissioner of Internal Revenue should instruct appropriate officials to ensure that the communications effort specifically includes state and local adoption officials, and clarifies acceptable documentation for the certification of special needs adoptees. |
In its response to our report, IRS agreed with the recommendation, and plans, as part of its adoption communications strategy to undertake targeted outreach to state adoption officials and adoption organization representatives, highlighting adoption documentation requirements, and including specific messages for documentation of special needs status. In response to our recommendation, for the 2012 filing season, IRS reported that it took several actions including revising instructions to Form 8839, Qualified Adoption, and updating its website, irs.gov, to add information about 2012 for adoptive parents. In addition, for the 2013 filing season, IRS reported taking more actions including issuing email alert to adoption advocacy and public policy organizations; issuing IRS Tax Tip 2013-54, Ten Facts about Adoption-Related Tax Savings and presenting GAO's findings to members of the IRS/EITC Software Developers Working Group which includes software industry representatives. IRS's efforts led to increased awareness on the part of stakeholders and taxpayers dealing with the adoption tax credit for the 2012 and 2013 filing seasons.
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| Internal Revenue Service | For the 2012 filing season, the Commissioner of Internal Revenue should instruct appropriate officials to provide examples of adoption assistance agreements that meet the requirements for documenting special needs status, from each state and the District of Columbia, in training materials given to reviewers and examiners. |
In accordance with our recommendation, IRS initially placed 24 examples of state adoption agreements on an internal website for the use of IRS examiners and reviewers and by the 2013 filing season. IRS continued to add examples during the 2012 season and had 45 examples available. This led to IRS examiners being better prepared to evaluate claims for credits for adopted children with special needs.
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| Internal Revenue Service | For the 2012 filing season, the Commissioner of Internal Revenue should instruct appropriate officials to place the agreements on its website to help taxpayers better understand what constitutes acceptable documentation. |
In IRS's statutorily-required response to our report, IRS said that while posting examples of assistance agreements on its website might be helpful for taxpayers, doing so might also enable unscrupulous individuals to create fictitious documents and submit fraudulent claims. In February 2013, IRS confirmed that this continues to be its policy.
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| Internal Revenue Service | For the 2012 filing season, the Commissioner of Internal Revenue should instruct appropriate officials to determine whether requesting documentation in cases where no documentation is provided before initiating an audit would reduce the number of audits without significantly delaying refunds and, if so, implement such a strategy for the 2012 filing season. |
In IRS's statutorily-required response to our report, IRS said that it had done a comprehensive review of its compliance strategy at the end of the 2011 filing season. IRS provided a summary of the review and its conclusions. IRS concluded that, with the greatly reduced number of claims it expected during the 2012 filing season, the enhanced outreach and education efforts it planned to make and the changes to the credit claim form, and the fact that the 2012 filing season will be the last with a refundable credit, the best course of action was to continue sending returns with missing or inadequate documentation directly to Examination after initial receipt.
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Topics
AuditsChild adoptionClaims processingCommunicationDocumentationExpense claimsIncome taxesReporting requirementsStrategic planningTax administrationTax creditTax refundsTax returnsTaxpayersStakeholder consultations