The IRS Is Sending Automatic Refunds to Certain Families Who Never Applied for Them

An IRS envelope usually signals a problem. For more than 50,000 taxpayers, though, it now means money back that they did not ask for.

The refunds come from unused adoption tax credits that families had kept carrying forward because their tax liability was too small to use them up. Treasury has taken a new reading of the Working Families Tax Cuts law, allowing those stranded credits to be paid out as cash for tax year 2025, up to $5,000 per child. The IRS is issuing the payments automatically, so no amended return is needed.

How the Treasury's New Interpretation Created Refunds

The IRS said it began sending the refunds and expects to complete most eligible cases by the end of the year. Under Treasury's clarified interpretation, adoption tax credit carryforwards from earlier tax years can increase the refundable part of the credit for 2025 only, subject to the $5,000 per qualifying child cap.

The refund results from two parts of the tax code working together. Section 23(c) allows an unused adoption credit to move forward, but only through the fifth taxable year after it first arose, with the credits used in first-in, first-out order. Section 23(a)(4) makes the portion of the credit up to $5,000 refundable. A refundable credit still pays you even after your tax bill is reduced to zero.

Until this change, older carryforwards could only offset tax. Families with modest incomes often watched those credits sit unused as the five-year clock ran down. Many of those taxpayers were grandparents who had adopted their grandchildren.

A Retired Couple's Example

Take a sample case of a retired couple in their mid-60s who adopted their grandson in 2022. Assume they qualified for a $15,000 adoption credit. Their federal income tax, mostly from a small pension and the taxable portion of Social Security, is about $1,500 a year.

On the family's original return, the credit eliminated the $1,500 tax bill and the rest carried forward. After the IRS adjustment, $5,000 of that carryforward becomes refundable, the nonrefundable portion still offsets the $1,500 tax, and $4,000 moves into the next year. That leaves them with $5,000 in cash after filing.

Who Can Receive the Automatic Refund

Families who adopted children with special needs, often through foster care, may have large credit balances even if they paid little out of pocket. Section 23(a)(3) treats a finalized special-needs adoption as if the family had incurred qualified adoption expenses up to the full credit amount, regardless of what they actually spent.

The IRS says notices generally arrive within 30 days after an adjustment. Each notice shows the amount and whether it became a refund or was instead used to pay another tax or non-tax debt. Back taxes or certain federal debts could keep the money from ever reaching you.

Review the notice carefully against your return and keep it with your tax records. The IRS app, which replaced IRS2Go, can be used to check refund status and view certain notices. Scammers also market fake tax credits, and the IRS has warned about such schemes. The actual adoption adjustment costs nothing and requires no filing, so any request for a fee should be treated as a warning sign.

What Happens to Remaining Credits After 2025

The IRS describes this special refundable treatment as a 2025-only rule. Any balance carried into the following year, such as the couple's $4,000, should return to offsetting tax only, while the five-year carryforward clock continues to run.

For retirees, that can turn leftover credits into a planning tool. A credit that only offsets tax is most useful in a year when tax is owed. One strategy is to intentionally increase taxable income, such as through a partial Roth conversion, so the credit can absorb tax that would otherwise be paid. That kind of move can raise Medicare premiums later and make more of Social Security taxable, so the numbers should be checked first.

This refund is federal. State adoption credits follow separate rules, and some states do not offer them at all. The IRS expects most adjustments to be completed before the end of the year, so taxpayers should keep checking their mail. If a sizable carryforward still remains after this refund, a CPA or fiduciary adviser can help time income so the credit is used before it expires.

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