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Adoption CPA comments on high IRS Tax Audit rate for Form 8839 | 2012 Adoption Credit

Adoption CPA Form 8839 CPA 2012

Gary Bode, CPA: the Adoption Credit serves tax planning and cash flow budgeting. (910) 399-2705.

Adoption CPAs saw a huge increase in the number of Form 8839(s) filed in the last few years. Hi, I’m Gary Bode, CPA. I’ve been working with the Adoption Credit for over a decade. I think it’s a great example of tax legislation promoting social goals. And when the Adoption Credit became refundable (sadly changed for 2012), the number of claims went from 84,297 to 101,627 according to a TIGTA (Treasury Inspector General for Tax Administration) report.

The Potential Down Side of the 2012 Adoption Credit and Form 8839

  • You pay the adoption expenses up front. Your cash flow has to support the adoption, sometimes for up to 20 months depending on when you incur the cost and file Form 8839. If you’re working as an employee, you can adjust the income tax withholding on your paychecks in anticipation of the Adoption Credit. Planning is prudent. Here’s our post on cash flow planning for Form 8839.
  • The IRS has extensive delays in processing Form 8839. You have to paper file it, so you lose the speed of E-Filing. Again, planning is prudent.

“Here’s a nasty surprise, the GAO (Government Accountability Office) states the IRS audits 68% of Form 8839(s)” 
– Gary Bode, adoption CPA and tax accountant

  • The Adoption Credit dropped $710 for 2012, now it’s $12,650.
  • At the moment, the Credit isn’t refundable although adoption CPAs expect to see that changed.
  • At the moment, it looks like only special needs children will qualify for the Adoption Credit in the 2013 tax year.

How the Adoption Credit Works

  • For a special needs child, the parent(s) can claim the entire $12,650 without regard for qualifying adoption expenses.
  • For a non special need child the parents claim the qualifying expenses up to the maximum of the credit.
  • You claim the credit on Form 8839 when you file your annual Form 1040.
  • The Adoption Credit offsets your 2012 tax liability.
  • If your expenses exceeded your 2012 tax liability, you lose the rest of the credit. Remember President Obama is trying to make the 2012 Adoption Credit refundable.
  • Here’s our past post on how the Adoption Credit works in NC. Remember your State may be different. Please note I can work with you for in any State except CA and HI.
  • In some cases expenses incurred last year, that you couldn’t claim because the adoption wasn’t finalized until 2012, may be refundable.

68% IRS Tax Audit Rate for Form 8839

Well that’s a good thing. Adoption CPAs don’t like to see fraud. My opinion is that fraud in the Adoption Credit caused some of the negative changes listed above. As an adoption CPA I try to plan so there are fewer surprises. I anticipate IRS red flags and prepare a well documented and logical presentation. So if an IRS Agent looks at your Form 8839, potential issues are already addressed.

I’m an adoption CPA with a virtual office to serve clients almost wherever they live. Planning and documentation are vital to claiming the Adoption Credit on Form 8839. I offer a free consult by phone: (910) 399-2705.

Past posts on Form 8839 include Form w-7a, the application to obtain a Tax ID for your child.

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