Audit finds that dead people were among beneficiaries of homebuyer tax credit

November 4, 2011

Remember the federal tax credit programs offering $7,500 and, later, $8,000 to first-time home buyers? The credits were designed to deliver a jolt to the reeling housing industry. And they did: More than 4 million people applied for and have received nearly $30 billion worth of credits.

Most of them, according to the Internal Revenue Service, went to people who legitimately qualified for the credits. But a series of audits has documented foul-ups by the IRS, ranging from credits granted to prison inmates and dead people, fraud schemes involving claimants who never bought a house and even credits for purported home purchases by teenagers and kids as young as 3 years old.

Far more commonplace, however, according to auditors, were shortcomings by the IRS in distinguishing between taxpayers who were supposed to repay their credits over a 15-year period — as required under the original $7,500 program in 2008 — and people for whom there was no such requirement under later versions of the program allowing credits as much as $8,000. The agency also had trouble determining whether recipients of the non-repayable credits might have violated rules by selling their homes before the three years of required residency and earning a profit on the sale.

Now a new audit has turned up still more problems. According to the inspector general, the IRS has been sending “incorrect” notices to thousands of taxpayers, either informing them that they owe no repayments on their credits when they actually do, or demanding repayments from recipients who legally owe nothing.

The latest audit found that 61,427 homeowners were sent erroneous notices, including:

●27,728 who bought homes in 2009 under the non-repayable program but were told to send in payments.

●12,495 who received the 2008 version of the credit, which was essentially an interest-free loan, but were told no repayments are due.

●832 dead people who were asked for repayments on their credits even though the law waives any repayment requirements for deceased taxpayers.

An additional 18,220 owners who were supposed to receive notices of repayments due on their credits never were sent them. The audit also found that an outside vendor hired by the IRS to help identify credit recipients who might have sold their homes early used faulty data that led to 53,558 taxpayers receiving notices erroneously demanding repayments.

A key contributor to the early mistakes by the IRS was that the original version of the credit rules required essentially no documentation of home purchases. J. Russell George, Treasury’s inspector general for tax administration, told a congressional hearing this year that “we estimate that at least $485 million of the more than $513 million of potentially erroneous claims we identified were issued with no IRS scrutiny, such as an examination or steps to validate the claim. These erroneous credits might have been denied if documentation requirements were in place.” After audits turned up signs of taxpayer misunderstandings — along with outright fraud — Congress required that documentation be submitted with all credit claims, including a HUD-1 settlement sheet showing the purchase date and other details.

The repayment issue — both for people who sell their houses too early and for those who are supposed to be making regular annual payments because they purchased using the $7,500 credit in 2008 — appears to be an ongoing problem for the IRS. Of particular concern to auditors are the agency’s difficulties in keeping track of taxpayers’ current addresses and home sales. The unnamed vendor hired to help with the process provided “incomplete and/or inaccurate” information in 41 percent of cases in a statistical sampling, triggering incorrect notices to taxpayers, according to auditors.

The IRS says the tax credit program has “posed administrative challenges.” In response to the latest audit, Richard Byrd Jr., IRS commissioner for wage and investment, cited the multiple legislative versions of the program and its “unprecedented” scope. A subsequent IRS statement noted that the agency proactively has sent out information to households affected by repayment rules and that “despite some data and programming errors” has achieved a “99 percent accuracy rate” in providing correct information. Nonetheless, IRS plans for the upcoming tax filing season include a shift to a Web-based tool that will help people determine if they have a repayment requirement.

In the meantime, if you’re one of the estimated million-plus taxpayers in this category, watch for the revised IRS notification approach. And if you get an official demand for a credit repayment that you know is wrong, don’t sweat it. You are probably not alone. Talk to your tax adviser to get it all straightened out.

Kenneth Harney’s e-mail address is kenharney@earthlink.net.

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