IRS Audited 69% of Filers Who Claimed Adoption Tax Credit
The Story: According to a report by the Taxpayer Advocate Service, in 2012 the IRS requested additional information from 90 percent of returns claiming the adoption tax credit and went on to actually audit 69 percent.
The Background: As David French, an adoptive father explains, the adoption process is so extraordinarily expensive that it is out of reach for many middle-class families. The adoption tax credit helps offset the costs since under current U.S. tax law, Americans do not have to pay taxes on qualified expenses related to adoption. These expenses include adoption fees, court costs, attorney fees, traveling expenses, and other expenses for which the principal purpose is the legal adoption of an eligible child. French adds,
This audit wave got almost no media coverage, but what was the experience like for individual families? In a word, grueling. Huge document requests with short turnaround times were followed by lengthy IRS delays in processing, all with no understanding for the unique documentation challenges of international adoption.
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As an adoptive family, it's sometimes difficult to describe the immense challenges in gathering paperwork, opening your lives to social workers for home studies, then expensive travel to sometimes-corrupt foreign locales to then launch a new life with a child you love immensely but who is also experiencing his or her own culture shock and adjustment. All of this places a great strain on family finances and emotions. To then face an audit on the other side? All so the IRS can collect a whopping 1 percent additional revenue? It's beyond the pale. If the IRS is concerned about fraud, it can audit random samples, not the vast majority of adoptive families claiming the credit.
Why It Matters: Christians in America will never fully agree on social and political policies. But as a general principle I'd recommend we support policies that give people incentives for doing good and avoid doing evil (1 Peter 3:11). Most of our current legal incentives, particularly in the form of criminal law, focus on the latter (e.g., if you steal, you'll go to prison). All too rarely are we provided adequate incentives to do good, especially acts which go beyond the requirements of duty. The best we can usually hope for are incentives that protect us from bad consequences when we attempt to help others (e.g., Good Samaritan laws).
There are valid disagreements to be had about what constitutes incentivizing the good and how such policies should be implemented. But I suspect most Christians would agree that adoption is the type of supererogatory act that should be encouraged. That is why many Christians lobbied the U.S Congress to approve the adoption tax credit, an addition made in 1997 which allows American families to offset the high costs related to the process.
But why should Christians care that the IRS gives special increased scrutiny to those who claim this exemption? Because it provides a disincentive to adopt a child and could potentially leave thousands of children without parents.
No one chooses to adopt simply because they can deduct the expenses. And the tax credit likely doesn't affect the decision of most adoptive parents. But as almost all economists would say, when considering a policy we have to think about the margins by considering the cases where the decision can be swayed by seemingly minor incentives. Some people can only afford the expenses of adopting a child because of the tax credit. Other people may be eager to adopt but are so fearful of an IRS audit that it changes their decision. Whether or not we agree with the way they weigh such economic considerations, the fact is that in making life-changing choices incentives and disincentives can have profound consequences.
While Americans must be accountable to government authorities, we should also ensure that those authorities are being fair and just to all concerned. And one of the most significant ways we can give justice to the weak and the fatherless (Psalm 82:3) is by making it easier on prospective parents who want to give them a home.