Line Items


The IRS issued interim guidance Sept. 29 on the child adoption credit and income exclusion for employer reimbursements of adoption expenses, as expanded by the Patient Protection and Affordable Care Act (PL 111-148). For tax years beginning in 2010 and 2011, the act made the credit for qualified adoption expenses (QAEs) refundable rather than subject to the prior-year carryover for up to five years of credit amounts that exceeded an income phaseout. For both the credit and exclusion, it raised the maximum aggregate allowable amount per child in all tax years to $13,170, starting with 2010 tax years. The IRS outlined the latest guidance in a news release (IR 2010-100). In addition, the IRS released a draft revised Form 8839, Qualified Adoption Expenses, reflecting the changes. For a fuller discussion of the pre-Patient Protection Act credit and exclusion, see “Tax Treatment of Adoption Expenses,” JofA, April 2010, page 44.


In Notice 2010-66, the Service clarified how carryover amounts from pre-2010 tax years may be claimed in 2010. A credit amount claimed in a 2009-orearlier tax year and carried forward to a 2010 tax year is allowable as a refundable tax credit and is not subject to the income phaseout. Any additional credit amount claimed in 2010, however, is subject to the phaseout.


The notice also instituted substantiation requirements for 2010 and following tax years for the credit or exclusion that differ according to whether the adoption is finalized in the United States or in a foreign country and, if the latter, whether the country is a party to the Hague Convention on Protection of Children and Co-operation in Respect of Intercountry Adoption (Hague Convention). For adoptions of special-needs children—for which taxpayers may be eligible for the full credit amount regardless of the amount of QAEs—in addition to the above documentation of finalization, taxpayers must also attach a state determination of special needs. Taxpayers may redact “sensitive personal information” from an adoption order or special-needs assessment, but the Service reserves the right to require a nonredacted copy if deemed necessary to substantiate the claim.


In Revenue Procedure 2010-31, effective Sept. 29, 2010, the IRS provided a safe harbor for determining whether a foreign adoption has been finalized for purposes of claiming the adoption credit or exclusion.




In an audit, the Treasury Inspector General for Tax Administration (TIGTA) found that 8% of individual taxpayers who had claimed a foreign earned income exclusion had overstated their exclusion amount by an aggregate total of $410 million. Another 2% of the returns, representing $265 million in excluded income, failed to properly show taxpayers met foreign residency requirements for the exclusion. The errors resulted in an estimated $90 million revenue loss for tax year 2008 returns, TIGTA said.


IRC § 911 allows certain U.S. taxpayers with a tax home in a foreign country to exclude from U.S. taxable income up to $91,500 (for the 2010 tax year) of their foreign earned income. Another exclusion or deduction is available for foreign housing costs.


In response, the IRS said it would review the 23,334 erroneous returns flagged. Improvements Are Needed to Reduce Erroneous Foreign Earned Income Exclusion Claims, TIGTA audit report 2010-40-091, is available at




Under IRC § 106(f), as added by the Patient Protection and Affordable Care Act (PL 111-148), starting Jan. 1, 2011, amounts paid or reimbursed under an employer-provided plan for the cost of drugs or medicines that are available without a prescription are no longer excludible from the employees’ gross income (such as via flexible spending arrangements, health reimbursement arrangements or health savings accounts) unless such drug or medicine (1) is prescribed (regardless of whether it requires a prescription) or (2) is insulin. See Notice 2010-59,




The Plain Writing Act of 2010, PL 111-274, was signed by President Barack Obama on Oct. 13. It requires certain federal documents, including those necessary for filing taxes, to be written in “plain language,” defined as “writing that is clear, concise, well-organized, and follows other best practices appropriate to the subject or field and intended audience.” In House floor debate, U.S. Rep. Brian P. Bilbray, R-Calif., described the act’s potential benefits this way: “My wife is a tax consultant, and I would love to see the day that we make the IRS and tax consultants obsolete so I can see more of my wife during certain times, put them both out of business. And maybe this is one step there.”


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