During the week of September 27, 2010 the IRS released guidance stating that adoption tax credit amounts carried forward from previous years are also refundable, so even parents who adopted as long ago as 2005 can benefit from the new law. These changes mean that if you adopted a foster child between 2005 and 2010 and the child receives adoption subsidy, you may be eligible for thousands of dollars in federal adoption tax credit!
Here is an update from the North American Council on Adoptable Children (NACAC):
IRS has confirmed that 2005–2007 tax returns may be amended to claim the adoption tax credit.
Typically, the IRS does not permit amendments of tax returns older than three years to claim a refund for a credit. These are considered closed tax years. For the adoption tax credit, however, the IRS has now confirmed that people can amend returns from closed tax years in order to establish the adoption tax credit. Taxpayers cannot get a refund for any credit they were due to be in paid in these closed years, and must deduct any amount they would have received from the amount to be carried forward. They can carry over any remaining unused or unlost credit to 2008, 2009, and 2010. And, of course, in 2010 the credit is refundable so any remaining credit should be due to the taxpayer. (Adoptions before 2005 cannot be carried to 2010.) We’ve heard from a few parents who adopted in 2005 and 2006, and were turned down for these older amendments. If that happens to you, you should appeal right away. We have drafted some sample language parents can use in the appeal.
If you are improperly denied the credit or need help with a closed tax year appeal, please contact NACAC at firstname.lastname@example.org. If you are just waiting, we encourage patience. Unfortunately there isn’t anything we can do to speed up the process.
The IRS has put in writing that the adoption subsidy/adoption assistance agreement is acceptable documentation of special needs. The language IRS has come up with can be found here. If the IRS tells you that the adoption subsidy agreement is not acceptable documentation or that they need you to document expenses, you may want to include this link/language in your response to the IRS.
NACAC has reported that 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. The letters from the IRS typically include a Form 886-A, Explanation of Items, which details why the IRS has not approved the adoption tax credit. The most common explanations NACAC has heard are: (1) missing documentation; (2) the examiner’s rejection of the adoption assistance agreement as proof of special needs; and (3) calculation or carry forward errors.
If you receive such a letter and you claimed the credit correctly, you should write to the IRS explaining why you disagree, and either re-send any documentation requested or clarify that the adoption assistance agreement IS proof of special needs as stated in IRS question 13.
However, some parents have made mistakes in claiming the credit. If you are aware that you made an error but haven’t yet received a penalty letter, NACAC recommends 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).
If you have any questions, please contact NACAC at email@example.com.