IRS Is Automatically Refunding 2025 Adoption Credit Carryforwards: Who Qualifies, What the Notice Means and What to Do Before Filing 2026 | YCL CPA

Bottom line in one breath

On October 16, 2026 (IR-2026-123), the IRS said it has already begun automatic refunds to more than 50,000 adoptive families: for tax year 2025 only, adoption credit carryforwards from 2020–2024 can count toward the refundable part of the adoption credit (up to $5,000 per eligible child). Most eligible families do not need to amend — but you should check the IRS notice, fix your carryforward worksheet for 2026, and consider a Form 843 penalty abatement request if you paid an estimated tax penalty.

News background

The One, Big, Beautiful Bill Act (Pub. L. 119-21, also called the Working Families Tax Cuts) made part of the adoption credit refundable starting in tax year 2025: up to $5,000 per eligible child (indexed to $5,120 for 2026 under Rev. Proc. 2025-32).

The 2025 Form 8839 and most tax software computed the refundable part using only the current-year credit, so families whose credit came from prior-year carryforwards often saw those amounts used only as a nonrefundable credit.

Treasury has now clarified its interpretation: for tax year 2025 only, carryforwards available for use in 2025 (originating in 2020–2024) may be included when figuring the refundable portion, subject to the $5,000-per-child limit and the normal adoption credit rules.

The IRS will not revise the 2025 forms or instructions. Instead it is making a systemic account adjustment. Refunds and adjustments began in late September 2026, and the IRS expects most to be finished by the end of 2026.

Returns filed before April 15, 2026 are generally adjusted automatically. Returns filed on extension, or accounts with identity theft indicators, freezes, dependency conflicts or other issues, will be reviewed later in 2026 once processed or resolved.

Affected taxpayers receive a notice generally within 30 days of the adjustment showing the amount and whether it was refunded or applied to another tax or non-tax debt. Sources: IRS IR-2026-123; IRS "Questions and Answers about Adoption Tax Credit Carryforward" (updated October 8, 2026); IRS Adoption Credit page; Rev. Proc. 2025-32.

Old rules vs. new rules

Before 2025: the adoption credit was fully nonrefundable. Any credit above your tax liability carried forward for up to 5 years (oldest first) and was then forfeited.

2025 as filed (forms as issued): up to $5,000 per child of the credit was refundable, but the calculation generally did not include prior-year carryforwards.

2025 after Treasury's clarification: carryforwards from 2020–2024 that were available in 2025 may also increase the refundable portion, still capped at $5,000 per eligible child. The IRS applies this systemically — do not alter Form 8839 lines to force it.

2026 and later: the special carryforward treatment does not continue. Follow the 2026 forms and instructions; the 2026 refundable limit is $5,120 per child, the maximum credit/exclusion is $17,670, and the MAGI phaseout is $265,080–$305,080 (2025: $17,280 maximum; phaseout $259,190–$299,190).

What does not change: AGI, taxable income and qualified adoption expenses are not affected. Married couples generally must still file jointly to claim the credit, and the credit/exclusion ordering rules (exclusion first, Part III before Part II) remain.

Are you affected? Self-check list

You filed a 2025 Form 1040, 1040-SR or 1040-NR, and claimed (or were eligible to claim) the adoption credit on Form 8839.

You had unused adoption credit from 2020–2024 available in 2025 (for example, a finalized domestic adoption or a finalized international adoption with expenses claimed in an earlier year).

Your 2025 return did not already receive the full refundable amount for each eligible child.

You did not claim the credit on your 2025 return but filed Form 8839 for 2020–2024 showing a carryforward — you may still be adjusted, but missing information may require Form 1040-X with Form 8839.

You filed your 2025 return on extension (by October 15, 2026) — expect review later in 2026, not immediately.

You paid an estimated tax penalty on 2025, have a past-due debt that could offset a refund, or file jointly with a spouse who has a separate debt.

You used your adoption carryforward as a nonrefundable credit when other credits (for example Form 5695 residential clean energy, Form 8801 prior-year minimum tax, or Form 3800 general business credit) could have absorbed that tax instead.

Simplified example

Illustrative only; the IRS computes your actual adjustment from your return and account.

A married couple finalized a domestic adoption in 2023. After using part of the credit in 2023 and 2024, they had a $8,950 carryforward available in 2025. Their 2025 tax before credits was $2,500, and they had no new adoption expenses in 2025.

As originally filed: $2,500 of the carryforward was used as a nonrefundable credit, $0 was refundable, and $6,450 carried forward to 2026.

After the systemic adjustment: up to $5,000 of the 2025 credit is treated as refundable. The nonrefundable part still offsets the $2,500 of tax, and the refundable $5,000 can be refunded (or applied to any debt). The carryforward to 2026 drops to about $1,450.

What they should do: keep the IRS notice, recompute the "Nonrefundable Adoption Credit Carryforward Worksheet — Line 18" using the 2025 Form 8839 line 18 amount plus the increase in refundable credit shown on the notice or transcript (not the total refund), and use that corrected carryforward on the 2026 return.

Action plan and timeline

Now through December 2026: watch for an IRS notice; check your IRS Online Account or account transcript. "Where's My Refund?" will not show this adjustment. Do not call the IRS unless a notice tells you to.

If you receive a notice: compare it with your 2025 return and Form 8839. If you agree, no response is needed. If you disagree, you may need Form 1040-X with Form 8839 and support.

If you paid a 2025 estimated tax penalty: the IRS will not automatically recompute it. Request abatement following the penalty notice, or file Form 843.

If a joint refund is offset for one spouse's debt: consider Form 8379, Injured Spouse Allocation.

If your carryforward was missing or wrong on the 2025 return, or you want to change other credits: discuss Form 1040-X; do not amend solely to request the systemic adjustment.

If you filed on extension: allow for review later in 2026; keep documents ready.

Before the 2027 filing season (2026 returns): carry the corrected carryforward into 2026, keep notices and worksheets, and plan any 2026 adoption expenses and employer adoption benefits (W-2 Box 12, Code T) under the 2026 limits.

How YCL can help

Notice review: we reconcile the IRS adjustment notice against your 2025 return, Form 8839 and account transcript.

Carryforward worksheet: we rebuild the 2025-to-2026 adoption credit carryforward correctly so the 2026 return is not overstated or understated.

Penalty and offset follow-up: Form 843 abatement requests for estimated tax penalties and Form 8379 injured spouse allocations where relevant.

Amendment decisions: we evaluate whether a Form 1040-X is needed (missing carryforward, other credits, filing status) — and when it is not.

Adoption planning: domestic and international adoption timing, special needs adoptions, ATIN/ITIN for the child, and employer adoption assistance programs.

YCL is a multistate CPA firm serving clients nationwide, in English and Chinese.

FAQ

Q: Do I need to file an amended return to get the adoption credit carryforward refund?

A: Generally no. If your account is eligible, the IRS adjusts it systemically and sends a notice. File Form 1040-X only if you need to correct something else, such as a missing carryforward amount, or if you disagree with the adjustment.

Q: Will I receive $5,000?

A: Not necessarily. The refundable portion for 2025 is capped at $5,000 per eligible child; your actual result depends on your allowable credit, carryforwards, income limits, payments, other credits and any offsets.

Q: Does this apply to my 2026 return too?

A: No. The carryforward treatment is for tax year 2025 only. For 2026, follow the 2026 forms and instructions (refundable limit $5,120 per child), and use the corrected carryforward after the 2025 adjustment.

Q: Will the IRS remove my 2025 estimated tax penalty automatically?

A: No. If the larger refundable credit would reduce or eliminate the penalty, request abatement under the instructions in your penalty notice or file Form 843.

Book a consult

YCL Accounting & Consulting (YCL Tax, Accounting & Advisory)

Multistate CPA firm serving clients nationwide

Web: yclcpa.com ｜ Email: info@yclcpa.com

Phone: 919-802-8376 / 980-202-0666 ｜ WeChat: YCLUSA

Cary office: 1140 Kildaire Farm Rd. STE 208, Cary, NC 27511

Shanghai office: 2-516, Zhongye Xiangteng Plaza, Lane 31, Jiatong Road, Shanghai

Book a Free Consultation with co-founder Gloria (Chenchen) Liu, CPA.

Disclaimer

This article is general tax information only and is not tax or legal advice for any person. It does not promise any refund or tax result. It is based on IRS IR-2026-123 (October 16, 2026), the IRS adoption credit carryforward Q&As (updated October 8, 2026), the IRS Adoption Credit page and Rev. Proc. 2025-32; IRS guidance may change. Confirm details at irs.gov/AdoptionCredit and consult a licensed professional about your situation.