Processing Problems with the Federal Adoption Tax Credit
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Updated June 28, 2011
Almost all families who filed for the adoption tax credit appear to be experiencing significant delays in the processing of the credit. We are hearing from more and more people who have already received their expected refund, but many are still waiting.
Unfortunately, there is not anything NACAC can do to speed up the process. However, if you feel you have been denied the credit wrongly, we're definitely here to help you. Please e-mail firstname.lastname@example.org to let us know about your denial.
Most families seem to be receiving one of two letters from the IRS: (1) a notice that the return is being reviewed, or (2) a request for documentation. If you get the first, we think you need to be patient. For the second, simply send the requested documentation (even if you sent it before). The IRS has written that acceptable documentation of special needs includes a letter from the state saying that the child has special needs, a copy of the adoption subsidy agreement, or a letter from the state/county saying that the child is eligible for adoption subsidy (see question 13 of the IRS's FAQs). Put your name and social security number on each page of the documents.
Parents who adopted children with special needs (children who receive adoption assistance) do not need to verify adoption expenses, even though some versions of the IRS letter asks for this. We recommend writing a letter reminding the examiner that you do not need to have expenses since you adopted a child with special needs, and stating that you have included documentation of the child’s special needs. You can also print out the IRS's FAQs (see link above) and highlight the second paragraph of question 1.
Some families have received letters from the IRS stating that they owe thousands of dollars or that their refunds have been significantly reduced, primarily as a result of a penalty assessed for claiming a refund that the IRS has not approved. As we understand it, the IRS can assess taxpayers a penalty of 20 percent of any refund they claim that they are not due.
The letters from the IRS typically include a Form 886-A, Explanation of Items, which details why the IRS has not approved the credit. The most common explanations we have heard are:
- missing documentation
- the examiner’s rejection of the adoption assistance agreement as proof of special needs
- calculation or carry forward errors.
If you receive such a letter and you claimed the credit correctly, you should write to IRS explaining why you disagree, and either re-send any documentation requested or clarify that the adoption assistance agreement IS proof of special needs (we recommend highlighting the IRS’s FAQs; see question 13).
Once your refund has been approved, the penalty should disappear.
However, we also have spoken to several parents who made mistakes in claiming the credit, such as:
- claiming the credit more than one year; for example, requesting $12,150 for an adoption in 2009 and then seeking an additional $13,170 for that same adoption in 2010
- claiming the full credit for an adoption that does not meet the IRS’s definition of special needs (such as an international or private adoption of a medically fragile child without adoption assistance), when expenses were less than the maximum credit
If you are aware that you made an error but haven’t yet received a penalty letter, we recommend writing to the IRS to explain and correct your mistake. Assure them that the error was honest and that you are only seeking the amount that you are due.
If you received a penalty letter based on your error, you can apply for abatement of the penalty using Form 843 (http://www.irs.gov/pub/irs-pdf/f843.pdf). Explain why you made the error, and note that you are seeking abatement under the “reasonable cause” option under 5a. Be as detailed as possible about why the error happened (for example, if you used software that caused the problem, name the software, the date you completed the return, and what happened). We do not know if these penalties will be abated, but truly hope so.
If you have an error due to a professional tax preparer or tax preparation calculation error and the IRS will not abate your penalty, you should investigate the preparer’s guarantees. Many have guarantees that say they will cover penalties and interest if they made an error. See the most common preparers’ guarantees here:
- TurboTax — “If you pay an IRS or state penalty or interest because of a TurboTax calculation error, we'll pay you the penalty and interest.” Source
- H&R Block’s guarantees vary depending on whether you used an in-office preparer or at-home software. For an in-office preparer, they say, “The H&R Block Guarantee is included with every tax return we prepare. If H&R Block makes an error on your return, we'll pay resulting penalties and interest.” Learn more about the other guarantees
- Jackson Hewitt — “All paid Jackson Hewitt tax returns come with our Accuracy Guarantee. This entitles you to reimbursement of penalties and interest charged by a taxing authority if a Jackson Hewitt tax preparer makes a mistake completing your return.” Source
- TaxACT — “If you are assessed a penalty due to a calculation error in TaxACT Free Edition, Deluxe or State, we'll pay the penalty and interest.” Source
- Liberty Tax — “Our offices will give you the most accurate return and the largest possible refund. If the office makes an error in the preparation of your return that results in penalties and interest, the office will reimburse you for the associated penalty and interest initially assessed.” Source
If you used other software or a professional preparer, check out their guarantee policies. Please note that some guarantees require you to notify the preparer within a set timeframe, so read the small print and notify the company as soon as you are notified by the IRS.
If you have any questions, please contact us at email@example.com.