Costly fraud and error reported in home buyers' tax program

"Any time there is an opportunity to receive cash back, it tends to attract people who might have the intent to defraud the government," Stiff said.

Has credit helped much?

The tax credit was enacted to help jump-start the housing market by helping first-time home buyers.

When it took effect in April 2008, the program failed to motivate buyers. The tax credit was capped at $7,500, and the money had to be paid back over 15 years. To make the credit more appealing, Congress scrapped the repayment requirement. It also raised the cap to $8,000 starting Jan. 1 but continued to exclude investors, second-home buyers and people earning more than $95,000 a year.

Rep. John Lewis (D-Ga.), who presided over the hearing, said he appreciated the IRS's quick implementation of the tax credit programs and timely refunds, but he concluded that "we want to and we need to stop this fraud and abuse."

Experts who track the industry are at odds over how helpful the tax credit has been.

The real estate industry and other supporters say it has played a key role in propping up the housing market and helping clear a glut of lower-priced homes.

The National Association of Realtors estimates that 350,000 of the buyers who bought their first homes this year did so only because of the credit.

But the program's staunchest critics balk at the program's price tag and say taxpayers should not have to bear the burden. They attribute the recent pickup in sales mostly to plunging home prices and record-low interest rates. The tax credit, they say, has only succeeded in pushing potential buyers into purchasing homes earlier than they otherwise would have.

Meanwhile, lawmakers have offered roughly two dozen measures to keep the credit going. Reid's newest proposal would keep the $8,000 tax credit in place for four months and then lower the amount by $2,000 every three months. The proposal, which could be tacked onto an unemployment benefits measure possibly next week, would apply only to first-time buyers.

The plan is meant as an alternative to another proposal, by Sen. Christopher J. Dodd (D-Conn.) and Sen. Johnny Isakson (R-Ga.), that would extend the tax credit to all home buyers until June 30 and raise the income limits to $150,000, or $300,000 for a couple. But some lawmakers oppose the idea because of its estimated $16.7 billion cost.

The Obama administration has not taken a position on extending the tax credit.