Adoption exps pd with loan

[AZ-Tax]

I just got off the phone with an IRS examiner or agent, heck if I know. TP claimed $15K of adoption related exps relating to 1 adoption finalized in 2010 on TP's 2010 tax return. IRS sent a letter back in May 2011 stating the TP's income does not support the $15K of exps. I replied to the IRS showing proof TP obtained a $5K loan. Months passed then the fall of 2011 the IRS says they cannot accept any exps that was paid by a loan for which the loan was not paid off so I went round and round with the IRS. Finally after requesting a phone call from the IRS since last fall, I get a call today. In the phone call, I was told that when the loan is paid off, attach a document of proof the loan is paid off, complete the 2011form 8839 and claim that additional $5K of adoption related exps. Sure enough looking at 2011 form 8839, there is a place to claim additional exps for an adoption that was finalized in 2010. Ok but then after I hung up, it dawned on me, if they paid off the loan in 2012, they will need to claim those additional $5K exps on their 2012 tax return for which the refundable tax credits expire end of 2011 but the Adoption credit and adoption assistance programs.expires after 2012. Am I correct that the TP will have to have Fed tax liability of at least $5K in 2012 to be able to obtain $5K of adoption tax credits meaning the credits go from refundable in 2011 to non refundable in 2012. The IRS and their delaying tatics.

[Gary2]

I don't suppose you asked them exactly which code section, regulation, ruling, or other official guidance leads to that conclusion? In other cases, such as student loan, there's no such treatment.

[S T]

Would Question Examiner

Why would it matter if the Adoption Expenses were funded by a loan - would that be any different than the Mortgage Loan and someone claiming the 1st Time Homebuyers Credit? or other Tax Credits for that matter.

If all of the Adoption criteria were met for the Credit - I don't see where a Loan would enter into the qualification for the Adoption Credit.



Sandy

[BP.]

IRS sent a letter back in May 2011 stating the TP's income does not support the $15K of exps.

That's disturbing.

IRS says they cannot accept any exps that was paid by a loan for which the loan was not paid off

And that is perplexing.

Am I correct that the TP will have to have Fed tax liability of at least $5K in 2012 to be able to obtain $5K of adoption tax credits meaning the credits go from refundable in 2011 to non refundable in 2012.

I think you are correct, but what an outcome!
Thanks for the post, and keep us informed on this, OK?

[Burke]

Bang this one up the ladder; and do it in writing!

[Gary2]

Bang this one up the ladder; and do it in writing!

Is that a colloquialism for "Elevate this issue to the agent's supervisor, or to appeals, or to whatever path is available?" I've never heard that expression.

[Koss]

Adoption Credit

That one definitely has to go to appeals, if you can't get it resolved through the examiner or their supervisor. The examiner is probably confused because there are some rules that say you can't take the credit for expenses that are paid by a third party, such as an employer or some state government program that helps with such expenses.

For an IRS examiner who is simply not thinking clearly, or looking for a reason to deny the credit, "paid by a loan" can sound a lot like "paid by someone other than the taxpayer," or "not paid by the taxpayer."

That's not how it works, as others have observed.

That kind of thinking is just goofy enough that if you actually have to take it to appeals, the client might be able to later bring an action in the tax court to recover attorney's and accountant's fees associated with the appeal, because the IRS position was unreasonable.

You ought to call up the examiner and ask whether it makes a difference if the child was put up as collateral for the loan...



BMK