Adoption write-offs difficult to achieve

In 2010, Congress increased the adoption tax credit to up to $13,360 and made it refundable for two years, allowing adoptive parents to potentially reduce tax liability to zero and get money for any unused portion of the credit. Supporters felt that this would support families and encourage adoption.

So far, so good. The problem is that obtaining the credit is extremely difficult. Those claiming the credit can't file returns electronically; the IRS requires paper documentation of adoption expenses. That's where the trouble begins, according to reports by National Taxpayer Advocate Nina Olson. She notes that 90 percent of returns claiming the adoption credit during the 2012 filing season were subject to additional review; 69 percent were selected for audits. The average adoption credit correspondence audit currently takes 126 days.

However, few are ultimately rejected. Of the $668.1 million in adoption credit claims in tax year 2011, the IRS disallowed just $11 million — or 1.5 percent. The NTA found disturbing bureaucratic bungling at play. The report said auditors asked taxpayers to provide documentation “before reviewing the information the taxpayers included with their original returns,” which meant submitting the same documentation twice. It didn't help that IRS examiners “were not knowledgeable about the expanded adoption credit” or “how to handle the credit claimed for special needs children.”