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Originally Posted by ToniToot
ok, I had a failed adoption due to a scam. I filed for the adoption tax credit and received it. We were awarded restitution when the girl was sent to jail. We never thought we would see a penny since she was such a low life. We found out her history after the fact. We have started to receive checks from her. Does anyone know our obligation to the IRS?
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Theoretically, to the extent you are reimbursed for adoption expenses that were used to qualify for the credit, you may have to pay the tax credit back to the IRS. That's a basic application of the tax-benefit rule.
For example, let's say you had $15,000 of expenses that generated a $10,000 credit. If $5,000 of those expenses are subsequently reimbursed, no problem, as there would still be $10,000 of unreimbursed expenses that still qualify. But if more than $5,000 is reimbursed, then you would have an issue.
I'm not sure how recapturing the credit would be accomplished in this case. Maybe by filing an amended return for the year you originally claimed the credit, maybe by increasing your tax liability for the current year. It all depends on when the credit is utilized. It's a rare enough occurrence that it would be best to consult with a tax preparer.