The Internal Revenue Service says a Jacksonville, Fla.-based tax preparer is the first to be succesfuly prosecuted for fraud related to the federal first-time homebuyer tax credit.

James Otto Price III, 47, pled guilty on July 23 to falsely claiming the first-time homebuyer credit on a client

The Internal Revenue Service says a Jacksonville, Fla.-based tax preparer is the first to be convicted of fraud related to the federal first-time homebuyer tax credit.

James Otto Price III, 47, pleaded guilty on July 23 to falsely claiming the first-time homebuyer credit on a client’s federal tax return, the IRS said. He faces up to three years in jail and a fine of up to $250,000 when he is sentenced.

Price was indicted in May on 35 tax-fraud counts, including 15 involving the first-time homebuyer tax credit, The Florida Times-Union reported. Most of Price’s clients were unaware he was claiming the credit on their behalf and paying himself a $1,000 fee from their electronic refunds, a prosecutor told the paper.

In announcing Price’s conviction, the IRS claimed to have "a number of sophisticated computer screening tools" to identify tax returns that may contain fraudulent claims for the tax credit. The IRS says it has executed seven search warrants and currently has 24 open criminal investigations of potential instances of fraud involving the credit.

"We will vigorously pursue anyone who falsely tries to claim this or any other tax credit or deduction," said Eileen Mayer, chief of the IRS’ criminal investigations. "The penalties for tax fraud are steep. Taxpayers should be wary of anyone who promises to get them a big refund."

Congress has allocated $13.6 billion for the first time homebuyer tax credit program in the hopes of generating 2 million home purchases by Nov. 30.

Preliminary numbers from the IRS showed about 1.4 million taxpayers were expected to claim the credit on their 2008 tax returns, and that nearly 100,000 claims would be rejected because the applicants were not first-time homebuyers (see story).

According to a report by the Treasury Inspector General for Tax Administration, the IRS was having some difficulties processing claims for the credit because Congress raised the cap on the program from $7,500 for homes purchased in 2008 to $8,000 for homes purchased this year.

The IRS was forced to reprogram software to identify the date of purchase on claims forms filed electronically to identify the date of purchase in order to make sure it was not improperly rejecting claims exceeding $7,500. Paper returns were being manually reviewed to identify those requiring separate processing, the report said.

The Federal Housing Administration in May issued guidelines allowing first-time homebuyers to "monetize" the credit, applying it toward the purchase of a home with an FHA-backed mortgage without waiting for a refund check from the IRS.

Although HUD ruled the tax credit can’t be used to meet the FHA’s 3.5 percent minimum down-payment requirement, it can be used as an additional down payment and for other closing costs, which can help borrowers obtain a lower interest rate (see story)

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