The adoption credit is designed to help families who might not be otherwise able to afford adoption. The credit comes in the form of a tax refund. But the IRS has delayed giving the credit to some families, instead submitting their applications to long review processes because they lack the proper paperwork. The agency also awarded $11 million in fraudulent tax refunds under the credit.
A tax credit designed to help families adopt children is bogged down by delayed processing and erroneous claims by the IRS, a Treasury Department's watchdog reports.
The Inspector General for Tax Administration found that 43,295 claims for the adoption credit went through "a more lengthy and inefficient process" because they lacked the proper paperwork. And of those, the Internal Revenue Service eventually awarded $11 million in tax credits to families that didn't qualify.
The purpose of the credit is to help make adoption possible for families who otherwise might not be able to afford it. For 2010, the maximum credit was $13,170 per child. President Obama 2010 health care law made the credit a refund, meaning families had to submit a claim in order to get the money off their taxes.
Between January 1 and August 6, 2011, the IRS received more than 100,000 claims totaling $1.2 billion. But a little less than half of those claims lacked the proper paperwork and were sent to be reviewed, the inspector general found.
The IRS lacks the power to deny claims if proper documentation is not attached. Instead, all it can do is submit the claims to the review process.
But the inspector general suggested IRS apply for the power to deny, called "math error authority," and estimated that rejecting claims with missing paperwork could save the IRS $1.9 million to spend on other high priority programs.
"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, the Inspector General for Tax Administration. "Those who have valid claims for the credit should promptly receive it, and those who do not should have their claims promptly rejected."
The review process is not always effective. The report found that about five percent of applicants were awarded the credit without sufficient supporting paperwork, totaling about $50 million. And the inspector general's office estimated that $11 million of that was given to people who falsely filed a claim.
"Although the Adoption Credit provides benefits to many individuals who qualify, the unintended consequence of refundable credits is that they are often the target of unscrupulous individuals who file erroneous claims for these credits," the report said.
The IRS said it agrees with the inspector general's report, and is taking several steps to correct the problems, including applying for the ability to reject claims without paperwork.
The credit may not be given to families who are adopting foreign children until the adoption is complete, but the inspector general said the IRS has often given the credit to families while the adoption is still in progress.
And some families that have done nothing wrong are getting caught by the reviews as well. The study said the IRS incorrectly suspended $2 million worth of claims from families that had submitted all proper paperwork.
The Internal Revenue Service, or IRS, is the government organization that collects and reviews taxes, as well as issuing credits and rebates.
The ability to reject a claim because of a lack of proper paperwork is called "math error authority." The IRS currently doesn't have this authority.