An audit of refunds to taxpayers claiming the federal homebuyer tax credit concludes that although the IRS has made "significant strides" in detecting erroneous claims, millions of dollars have been paid out to prison inmates and for transactions involving homes purchased before the credit took effect.

The report, by the Treasury Inspector General for Tax Administration (TIGTA), identified 14,132 erroneous credits totaling at least $26.7 million — a tiny sliver of the more than $12.6 billion in refunds paid to date, but a troubling indication that the program remains vulnerable to fraud.

An audit of refunds to taxpayers claiming the federal homebuyer tax credit concludes that although the IRS has made "significant strides" in detecting erroneous claims, millions of dollars have been paid out to prison inmates and for transactions involving homes purchased before the credit took effect.

The report, by the Treasury Inspector General for Tax Administration (TIGTA), identified 14,132 erroneous credits totaling at least $26.7 million — a tiny sliver of the more than $12.6 billion in refunds paid to date, but a troubling indication that the program remains vulnerable to fraud.

The erroneous refunds included $17.6 million in credits allowed for 2,555 taxpayers who appear to have purchased their homes before the tax credit first took effect in April 2008, and $9.1 million in credits to 1,295 prisoners who were incarcerated at the time they reported purchasing their home.

The report also estimated "tens of millions of dollars" in credits were issued to 10,282 taxpayers who claimed to have purchased homes that were also used by other taxpayers to claim the credit. In one case, as many as 67 taxpayers listed the same home to claim the credit.

"The good news is that the IRS has made significant strides resolving problems associated with this program," said J. Russell George, the Treasury Inspector General for Tax Administration, in a press release announcing the release of the report.

Unlike a previous audit, no minors were found to have received the credit, he said.

"However, the bad news is that prisoners are allegedly improperly receiving the credit for buying homes while they are incarcerated," George said.

In addition, the report found that at least 34 IRS employees claimed the credit despite indications that they owned a home within the past three years. This is in addition to the 53 IRS employees identified in a previous TIGTA report issued in August.

In a memo responding to the report, Richard Byrd, commissioner of the IRS Wage and Investment Division, said the IRS "is running a well-rounded compliance program that has helped protect the interest of the nation’s taxpayers" but acknowledged that "more can be done to ensure the accuracy and legitimacy" of claims.

Byrd said that in the process of paying out more than $12.6 billion in tax credits to more than 1.8 million homebuyers through February 2010, the IRS has denied 285,504 claims that lacked adequate documentation.

In addition, the IRS has frozen 112,852 refunds pending civil examination, and conducted 114,418 post-refund and amended return audits. The IRS has also identified 98 potential criminal schemes, opened 155 criminal investigations, and recommended seven prosecutions, Byrd said.

Between August 2008 and November 2009, Congress passed three different versions of the credit, "each of which required the IRS to develop new forms and guidance, reprogram systems, and develop compliance filters. We appreciate that the report recognized many of the steps we have taken to prevent inappropriate claims from being paid."

"Given the complexity of tax administration and the time constraints the IRS is faced with in implementing legislation, it would be impossible for us to either stop or address every potentially erroneous claim," Byrd said.

But homes purchased before April 9, 2008, were never eligible for the tax credit, and the TIGTA audit found that the IRS approved some claims on home purchased in 2007 or earlier.

All of those claims were processed before July 2009, when the IRS initiated controls to identify such claims before refunds are issued.

Going forward, the IRS has developed a "Recapture and Repayment" strategy that will use third-party data to identify potential fraud triggers, including the date of a home’s purchase, Byrd said.

Prisons report the status of inmates to the IRS on a voluntary basis, and "without congressional action to require state and federal prisons to report the status of inmates to the IRS, there will be gaps in the data and compliance problems will persist," Byrd warned.

He said the IRS takes "very seriously" the issue of potentially erroneous claims filed by IRS employees, and "will continue to work closely with TIGTA on their investigative efforts to identify intentional employee noncompliance" with the homebuyer tax credit and other provisions of the tax code.

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