Incomplete or missing documentation led the IRS to delay processing 43,295 Adoption Credit claims and approve more than $11 million in erroneous claims, according to a report publicly released July 24, 2012, by the Treasury Inspector General for Tax Administration (TIGTA).
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The Adoption Credit is a credit 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' processes ensured the accuracy of Adoption Credit claims for tax returns filed between January 1 and August 6, 2011.
Although the IRS requires taxpayers to attach documentation to their tax returns supporting Adoption Credit claims, it does not have the math-error authority to deny the credit if documentation is not provided. 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.
As a result, 43,295 (42.6 percent) of the 101,627 total Adoption Credit claims were referred to the IRS' 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.
The review also identified 187 taxpayers who claimed the Adoption Credit for a foreign adoption that was not final. The Internal Revenue 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.
"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 J. Russell George, TIGTA. "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.
TIGTA Note: The difference between the date TIGTA issues an audit report to the IRS and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with federal confidentiality laws.
Source: TIGTA Press Release, July 24, 2012