August 24, 2013 Print

Chilling Effect

by Guest Author

TAKING AIM: Stephanie and Mark Swindell of Arizona faced an IRS audit after adopting their third child in 2010. Ultimately, it did not affect their return.

The IRS has been targeting adoptive parents for audits in recent years at a shocking rate, casting a pall over the already-difficult adoption process.

When Mark and Stephanie Swindell didn’t receive their tax refund in 2011, they contacted the IRS and were told they had been “randomly chosen” for an audit. Thus began a seven-month bureaucratic nightmare that turned out to have been anything but “random.”

During the audit, the Swindells answered every question the IRS asked and provided every document requested. But it was never enough.

“They’d ask us for a piece of information, we would fax it and then a couple of weeks would go by and we wouldn’t hear anything,” Stephanie tells Citizen. So she would regularly load up their three adopted children and drive down to the Phoenix IRS office.

Once there, the tax agent would tell her the board had rejected the Swindells’ tax return again, and ask for yet another piece of information they had not originally requested. It was maddening.

“Who is this review board and what do they need?” Stephanie remembers asking. “If they would have given us a list in the beginning, I would have given it to them. They just always wanted more.”

At one point, the apparent obstructionism became jaw-dropping, she says.

The couple needed to prove the special-needs baby boy they claimed for their adoption tax credit was really theirs. Fair enough. They provided a certified birth certificate from the state of Florida, where the baby was born, and the adoption papers in a certified letter from the judge. It was good enough for the state and the courts to give the baby to the Swindells, but apparently not good enough for the IRS to grant the tax credit.

“They actually asked me for ‘something more real.’ I said, ‘What do you mean?’ and (the IRS agent) actually said, ‘I don’t know, just something else.’ ”

The Swindells were dumbfounded.

But, as it turns out, they were far from being alone.

Targeting Adoptions

The key to the Swindells’ ordeal was that they had adopted a child and applied for the $10,000 federal adoption tax credit on their return.

It turns out the IRS has been targeting the tax returns of adoptive parents at an alarming rate, according to the latest annual report to Congress from the Taxpayer Advocate Service (TAS)—an independent organization within the IRS. About 90 percent of parents who filed for the adoptive tax credit in 2012 were required to provide more information to the IRS, and 69 percent of them were audited. That compares to just 1 percent of tax returns that are audited nationwide—meaning adoptive parents were being audited 69 times more often than average American taxpayers.

The IRS was only able to eliminate 1.5 percent of the tax deductions claimed by those adoptive parents, meaning there was almost no change in their tax results after all was said and done.

The TAS report is highly critical of the IRS because of the high targeting rate, the low return on tax dollars and the incredibly high burden placed on those audited—people who were not wealthy to begin with, and who had just been through the exhausting ordeal of adopting a child.

As taxpayer advocate offices around the country were being deluged with requests for help from adoptive parents, the TAS switched priorities for examining the 2010 and 2011 tax years to focus on the adoption issue.


TAS chief Nina Olson tells Citizen she was “shocked” when her office finished compiling the data and discovered the “extraordinarily high” rate of audits, particularly on low- and middle-income taxpayers.

The situation gets worse when comparing audits to the general taxpaying public. Less than one-tenth of 1 percent of taxpayers claim the adoption tax credit. But according to the TAS report and a similar one from the Government Accountability Office released in May, the IRS spent 3.5 percent of its entire staff time on taxpayers who claimed the adoption tax credit. So the tax collector devoted 35 times the resources to adoptive parents as to the general public.

IRS officials say the large tax credit was a red flag, and that in 2010 and 2011, Congress made it fully refundable. “You got it even if you did not pay taxes,” Eric Smith, an IRS spokesman in Washington, D.C., tells Citizen. “It not only wipes out your taxes, but goes beyond that” to give claimants a net surplus.

Because of the abuse of fully refundable tax-credit programs, specifically with the earned income tax credit and the first-time homebuyer tax credit, the IRS watched them keenly and set up more complicated requirements for filings, Smith says. (The tax credit has since reverted to one that goes against taxes owed, but can be spread over the following five years so it is still all received.)

But that answer doesn’t satisfy Olson.

“It was an incorrectly conceived program,” she says. “They treat all refundable credits the same and developed the fraud filters. It resulted in a lot of false positives. It wasted (the IRS’s) own resources.”

Even if the IRS is given the benefit of the doubt for 2010’s overreach, Olson points out that the organization should have sharply adjusted procedures for 2011.

“The data here is that there is no refund fraud” among the adoption tax credits, she explains. “They had that data from the 2010 tax year. They knew that in time to do something different for 2011 returns. And they didn’t. That’s where I fault them.”

Intent and Purpose

U.S. Rep. Bill Huizenga, R-Mich., first starting hearing the stories in his home church. Families adopting children were being audited, one after another. “It didn’t make sense,” he tells Citizen.

Until the TAS report came out, that is. That made sense. It also made Huizenga angry.

“These are good families trying to give kids a good home,” he says. “It has a chilling effect. Others question if they want to go through that.” He wrote a letter, signed by 35 other members of Congress, requesting a full review of the IRS’ auditing procedures.

Though no single agency tracks domestic and international adoptions, experts estimate that more than 100,000 children in foster care are waiting to be adopted in this country, as well as millions of orphaned children worldwide. Tens of thousands of parents are willing to adopt those children. About 135,000 children are adopted each year, with about 25 percent of those being international.

But the process of adoption can be prohibitively expensive, averaging about $34,000. So Congress created a $10,000 adoption tax credit to help parents defray some of the costs and promote the cause. According to the National Council for Adoption, children from stable homes have a much higher chance of becoming productive, law-abiding members of society, so Congress and multiple presidents have seen it to be in the nation’s best interest to encourage adoptions.

This raises a key—and as yet unanswered—question about the controversy: Is this an instance of purposeful malice or of broad incompetence?

Given the stakes with the IRS, either is trouble for the Obama administration and the federal government’s increasingly tattered reputation. Not only is the IRS the most feared and perhaps loathed federal agency, it is legislatively tasked with enforcing the massive and complicated federal health care law as it continues to be implemented.

As Huizenga says, the federal government is already suffering from a “trust deficit.”

It’s not just politicians and activists who see a very real problem with the IRS. An NBC/Wall Street Journal poll published in June found that only 19 percent of Americans have a positive opinion of the nation’s tax enforcement agency.

IRS, Adoptions and Obamacare

This year, the agency has been rocked by several scandals. (See “Season of Scandals” on page 18.) Though they collectively breach the public trust, they loom even larger in light of the fact that the IRS will be in charge of enforcing the new federal health care program. That involves one-sixth of the U.S. economy, not to mention the health and welfare of every citizen.

To many people, giving the IRS tremendously more power over individuals’ lives is a daunting thought.

“No government agency is more feared on the right, left or center,” Huizenga says. “This is a group that can shut you down, freeze your assets, lock your doors.”

There is a growing chorus of voices saying that the scandals—including the adoption audits—demonstrate the IRS’ inability to enforce Obamacare.

“It’s got to undermine American’s confidence in their government,” says Chris Jacobs, a senior policy analyst at The Heritage Foundation in Washington, D.C. “At best, it’s incompetence and at worst, it’s outright corruption.”

With the adoption targeting scandal, as with many others, no one has taken responsibility and no one has been disciplined, Jacobs says. “There is no accountability with the IRS.”

Heritage and many other organizations are urging Congress to repeal Obamacare. Short of that, lawmakers are considering removing the IRS’ authority to enforce the new law.

Perhaps that is the only real option.

Olson says TAS made several concrete recommendations for easing the burden on adoptive parents. Perhaps the most common-sense change was to create specific forms and affidavits issued by the state agencies certifying the legitimacy of an adoption for tax purposes. The IRS should accept the evidence provided by other government agencies, she says.

But Olson didn’t just get the cold shoulder. “I got a hot ‘No,’ ” she recalls. “I just don’t understand why they won’t go with an affidavit from the states. This doesn’t bode well for the IRS.”

Or, perhaps, for children hoping to be taken into a loving, permanent home.

For the Swindells, all of the months of hassles changed nothing. Their tax return remained the same, and they eventually received the tax credit they were due—minus the costs and headaches of the audit. All of the time and resources spent on both sides achieved nothing—except perhaps for a chilling effect on adoptions.

Rod Thomson’s most recent book is Living Threads: The Unbroken Connection of God’s People Through the Ages. He also runs The Thomson Group, a public relations and communications firm in Sarasota, Fla.

The Taxpayer Advocate Service’s full 2012 annual report is available at http://1.usa.gov/SkLjHv.  The adoption tax credit portion can be found at http://1.usa.gov/UQSkkh.

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