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 for Executive Action
|Internal Revenue Service||1. 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.|
|Internal Revenue Service||2. 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.|
|Internal Revenue Service||3. 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.|
|Internal Revenue Service||4. 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.|