The IRS Is Sending Automatic Refunds to Adoptive Families: What the New Carryforward Rule Means If You Also Owe Back Taxes

The IRS announced on October 16, 2026, that it has already begun sending automatic refunds to more than 50,000 adoptive families whose unused adoption tax credits are now refundable for tax year 2025. If you are one of those families and you also have a balance owed to the IRS or another federal agency, you need to read this before you start counting on that money.

What Changed and Why the IRS Is Sending Money Now

The refunds come from a Treasury reinterpretation of the Working Families Tax Cuts law. For tax year 2025 only, carryforwards from 2020 through 2024 can raise the refundable portion of the credit. That one word, “refundable,” is everything.

Here is the background. The adoption credit was nonrefundable before 2025, so families with small tax bills could only carry unused credit forward for up to five years. That meant the credit could reduce federal income tax to zero, but it could not ordinarily generate a refund by itself. Many families adopted a child, ran up thousands of dollars in qualifying expenses, claimed the credit, and then watched it sit unused because their annual tax bill was not large enough to absorb it.

The provision making up to $5,000 of the adoption credit refundable was introduced in the One Big Beautiful Bill Act, which was signed into law by President Donald Trump last year. The Treasury Department then clarified its interpretation of the Working Families Tax Cuts affecting the adoption tax credit. Under the new interpretation, for tax year 2025 only, adoption tax credit carryforwards from prior tax years (2020-2024) can increase the amount of the adoption tax credit that is refundable in 2025, subject to the $5,000 per qualifying child limitation.

IR-2026-123, issued October 16, 2026, confirms the IRS has already begun issuing refunds to more than 50,000 taxpayers who benefited from the adoption tax credit carryforward and expects the refund process for most eligible taxpayers to be complete by the end of the year.

Who Qualifies for the Automatic Refund

You do not need to do anything to trigger this adjustment, in most cases. The IRS will adjust affected taxpayers’ accounts to reflect this change and issue any resulting refunds, notifying taxpayers of any changes made to their accounts. Taxpayers should not need to file an amended return to receive the additional credit.

To be in line for automatic treatment, you generally need to meet these conditions:

• You filed a 2025 Form 1040 and had adoption credit carryforwards from 2020 through 2024 on Form 8839.
• You filed your 2025 return before April 15, 2026, and will generally receive any applicable adjustment automatically.
• Some of your carryforward was still unused after your 2025 tax bill was covered. If your tax bill absorbed the entire carryforward, there is nothing left to refund.

Taxpayers who filed 2025 federal income tax returns under an extension will be reviewed later in 2026. Taxpayers whose accounts have indicators of identity theft, holds, dependent conflicts, or other issues will also be reviewed later in the year once these matters are resolved.

One important gap to know about: families who left the carryforward off their 2025 return may need to file Form 1040-X to get the adjustment. If you never reported the carryforward, the IRS may not have enough information to make the change on its own.

The Part No One Is Talking About: Your Refund Can Be Taken to Cover a Debt First

This is the section that matters most if you owe the IRS, a state tax authority, or any other federal agency.

The IRS will notify taxpayers generally within 30 days of an adjustment. The notice will state the amount of the adjustment and confirm whether it resulted in a refund or was used to offset other tax or non-tax debt.

The Bureau of the Fiscal Service issues IRS refunds and can reduce one to pay prior taxes owed, or a past-due debt such as child support, federal agency nontax debt, or state income tax. In plain terms: if you owe back taxes or have other qualifying federal debts, the government can intercept your adoption credit refund before a single dollar reaches your bank account.

Back taxes or certain federal debts could prevent the money from ever reaching you. The notice you receive will tell you whether that happened and for how much, but by the time you read it, the offset has already occurred.

This is not a punishment or an error. It is standard IRS procedure under the Treasury Offset Program. It applies to virtually every type of federal tax refund. The adoption credit refunds are not exempt.

What to Do When You Receive Your Notice

You should review the notice carefully, compare it with your 2025 tax return, and keep it with your tax records. Here are the specific steps to take once it arrives.

Check the notice for an offset

The notice will show you the adjustment amount and tell you whether it was paid out as a refund or applied toward a debt. If the full amount was offset, you will receive an explanation of which debt it was applied to. You have rights in that process, including the ability to dispute an incorrect offset.

Understand where you stand with the IRS

If the notice confirms an offset for back taxes, that tells you the IRS has an active balance on your account. An adoption credit adjustment does not erase that balance. The remaining debt is still there, and interest and penalties continue to grow. Getting a clear picture of what you owe is the first step toward doing something about it.

Know that the 2025 carryforward window is closing

Any adoption credit balance carried into 2026 loses refundability and reverts to offsetting tax only, making planning essential before the five-year period expires. If you still have a carryforward after the 2025 adjustment, time is now working against you on that credit.

If You Owe Back Taxes, the Offset Is a Signal, Not a Solution

Seeing part or all of your adoption credit refund disappear into a tax debt can feel like the IRS gave you something and took it right back. In a way, that is exactly what happened. But it also means something useful: you now know your debt is active and that the IRS is collecting on it.

Taxpayers who owe the IRS may qualify for programs that could make the remaining balance more manageable, depending on their circumstances. Those programs include installment agreements, currently not collectible status, offers in compromise, penalty abatement, and others. Eligibility depends on your income, assets, filing history, and the specific nature of your debt. No outcome is guaranteed, and the right path is different for every taxpayer.

What is true for nearly everyone in this situation is that ignoring the debt makes it more expensive. Interest and penalties compound, and the IRS has collection tools including liens and levies that it can use if a balance is left unaddressed.

How Clear Start Tax Can Help

At Clear Start Tax, we work directly with individuals and families who owe the IRS or state tax authorities. We are not a referral network or a marketplace. We are a tax resolution firm, and when you call us, you are talking to our team.

If your adoption credit refund was offset, or if you already knew you had a tax debt and want to understand your options, a free consultation with our team is a good starting point. We will review your situation, explain what programs you may qualify for, and help you understand what realistic next steps look like for your specific circumstances.

The IRS notice is not the end of the story. For many adoptive families carrying both credit carryforwards and tax debt, it is actually the beginning of a conversation worth having.