Documents substantiating the adoption or attempted adoption are required to be attached to the taxpayer’s return. Acceptable documents are identified in the September 2010 guidance and in IRS publications. In addition, the IRS may ask for proof of expenses if a return is under examination. All taxpayers are advised to keep receipts for expenses claimed on a tax return for at least three years. That applies whether the expenses are related to adoption, medical care, charitable giving, a business, or pretty much anything else. If the IRS asks for evidence to support an item claimed on a tax return and the taxpayer cannot offer any, the item may be reduced or disallowed. This is standard operating procedure. The IRS has begun looking more closely at adoption claims. This is why you are now hearing about requests for verification of expenses. This relates to a statutory change that made the credit refundable. Before 2010, the credit merely offset taxes. The adoption credit was modified by the Affordable Care Act (PL111-148, section 10909), and then by the December 17th tax extenders bill (PL111-312, section 1(b)). The IRS has not yet issued any official guidance on the latter modification. We’ve recently launched webpage, Adoptive Parents: Don’t Delay Your Adoption Credit Refund. It contains a great deal of information on the refund, including necessary documentation, FAQ’s, etc.
Here are some additional details relating to the adoption credit:
As mentioned above, adoption claims are more likely to trigger an IRS inquiry now that the credit is refundable. If a return is chosen for examination, the IRS will request documentation that verifies the adoption and either (a) the expenses or (b) that it is a special needs adoption. Most adoptive parents can only claim a credit for the amount of their actual expenses. However, in the case of an adoption of a child with special needs, Internal Revenue Code section 36C(a)(3) says that adoptive parents will be treated as having paid expenses of $13,170 more than their actual expenses. Basically, this gives the maximum credit regardless of what expenses, if any, were incurred.
When a return that claims the adoption credit is selected for examination, the taxpayer is sent Form 886-H explaining what information is being requested. Part A of the form focuses on verification of the adoption and Part B focuses on verification of the expenses. We have redesigned the form to make clear that Part B does not apply to special needs adoptions. We expect the new version of the form to be approved and in use shortly. In addition, a new set of questions & answers will be posted on www.irs.gov.