IRS tax credit safeguards fall short

A 4-year-old …? How does a 4-year-old get approved for an $8,000 first-time homebuyer tax credit?

While Realtors, lenders, appraisers, home inspectors, escrow officers and every other professional service connected to home sales and financing are lobbying for an extension of the first-time homebuyer housing credit, a recent audit revealed thousands of fraudulent claims and a need for more safeguards to support the popular program.

It's disheartening that problems would surface in the one plan that is housing's primary driver, but I guess the fraud disclosure should not come as a surprise. Mortgage scams have been in the news. And, we are just now getting an indication of how many consumers are willing to participate -- especially if they think there is a chance the Internal Revenue Service will not discover their creative maneuvers.

The American Recovery and Reinvestment Act of 2009 revised and extended the first-time homebuyer credit provided for in the Housing and Economic Recovery Act of 2008 to Nov. 30, 2009. Taxpayers qualifying for the program may claim the $8,000 credit on either their tax year 2008 or 2009 individual income tax returns. As of July 17, 2009, more than 1.1 million tax returns claiming more than $8 billion had been processed.

The goal of the recent audit conducted by the Treasury Inspector General for Tax Administration (TIGTA) was to determine whether the IRS had controls in place that effectively identified erroneous claims for the tax credit.

It developed computer programs to identify 73,799 first-time homebuyer credits attached to an original U.S. Individual Income Tax Return (Form 1040), totaling almost $504 million, that were claimed by taxpayers who had indications of prior homeownership within the last three years.

According to the audit, the 73,799 taxpayers had entered information on their individual income tax returns for one of the prior three years indicating they may have owned a home. These entries included deductions for home mortgage interest, real estate taxes, deductible points, and qualified mortgage insurance premiums.

While the IRS adopted controls to identify many questionable claims for the credit, some key controls were missing, according to the TIGTA. Missing from the suggested safeguards was information provided on the First-Time Homebuyer Credit (Form 5405) to verify eligibility requirements. In addition, taxpayers were not required to provide documentation that they actually purchased a home.

The law defines a "first-time homebuyer" as any individual (and spouse, if married) who had no ownership interest in a principal residence during the three-year period prior to the purchase of the home to which the credit applies.

According to the audit summary, TIGTA identified 19,351 tax year 2008 electronically filed tax returns on which taxpayers claimed credits totaling more than $139 million for homes that had not yet been purchased. ...CONTINUED

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