The Government Accountability Office (GAO) has just released a study on the federal adoption tax credit. From analysis of Internal Revenue Service (IRS) data and documents, observations of IRS examiners, and interviews of IRS officials and other stakeholders, the GAO explored IRS’ communications, processing, and auditing strategy regarding the credit. CWLA and member agencies on our adoption advisory committee were among the stakeholders consulted for this report.
Senator Max Baucus (D-MT) and Representatives Charles Boustany (R-LA) and John Lewis (D-GA) requested the study citing the recent expansion of the credit and to identify possible improvements in advance of the 2012 tax year. The adoption tax credit was first established in 1996. The Affordable Care Act (P.L. 111-148) increased its maximum value from $10,000 to $13,170 and made it refundable for 2010 and 2011. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) made changes to the law by extending the credit through 2012, but as non-refundable and with a reduced maximum to $10,000. In 2013 and following, it will be limited to special needs adoptions and only available for qualified expenses up to a $6,000 value. Since 1996, $4.28 billion in adoption tax credits have been claimed, with $1.2 billion claimed in 2010.
The GAO determined that in 2011 there was diverse communications approaches to tax preparers and adoption advocates, but identified room for improvement in explaining certification requirements. In addition, they found that over two-thirds of almost 100,000 taxpayers claiming the credit were audited by mail, and that four-fifths of those audited had filed the credit accurately and none were fraudulent. These audits caused the IRS to expend unnecessary resources and delayed refunds for families. The study concludes with an outline of approaches to avoid both confusion and ineffective process that led to unnecessary expenditures in low yield tax oversight in 2011.