Costly fraud and error reported in home buyers' tax program
IRS HAMSTRUNG BY LIMITATIONS Lawmakers consider extension

By Dina ElBoghdady
Washington Post Staff Writer
Friday, October 23, 2009

Hundreds of millions of dollars may have been paid to people who fraudulently or mistakenly took advantage of a lucrative tax credit for first-time home buyers, including some who were employees of the Internal Revenue Service and even children, an IRS watchdog told a House panel on Thursday.

The findings, documented in a report by the Treasury inspector general for tax administration, come as debate heats up in Congress over whether to extend the $8,000 tax credit beyond its Nov. 30 deadline.

While the report alarmed lawmakers, supporters of the tax credit on Capitol Hill pressed forward with efforts to keep the refund alive. Senate Majority Leader Harry M. Reid (D-Nev.) is working on a proposal to extend the full $8,000 credit for four months and then gradually phase it out by the end of next year, according to his office.

Meanwhile, experts who are closely tracking the existing program say it's unlikely that the report released Thursday will undermine efforts to extend the credit given the bipartisan support it has received, especially from lawmakers representing states heavily hit by foreclosures. These lawmakers say the tax credit has helped boost home sales.

"There are simply too many Democrats and Republicans that want to see this program extended for it to get derailed by the inspector general's report," said Jaret Seiberg, a policy analyst at Washington Research Group.

4-year-olds claimed credit

The report found that more than 19,300 people claimed a total of $139 million on their 2008 tax returns before purchasing a home even though the law requires the purchase to take place first, J. Russell George, the inspector general, told a House Ways and Means subcommittee.

Nearly 74,000 buyers -- including some IRS employees -- claimed a total of $500 million in tax credits despite indications that they may have owned a home before, George said. The law bans people from getting this credit if they have owned a home in the previous three years.

Even children claimed the tax credit, said George, adding that 580 taxpayers under age 18 -- including some 4-year-olds -- claimed $4 million, presumably so their parents could dodge the income limitations imposed by the program.

George went on to criticize the IRS for not requiring buyers to attach documents that verify when they purchased their homes, something his office has been advocating. The IRS's deputy commissioner for services and enforcement, Linda E. Stiff, said the agency does not have the ability to accept such documents electronically, nor does it have the legal authority to disallow a claim if the documents are not attached, which would make such a requirement moot. Lawmakers indicated they would look into granting that authority.

Both Stiff and George said that there's a chance that some of the suspicious tax credit claims may prove to be legitimate once they are more thoroughly examined.

About 1.4 million households have claimed nearly $10 billion in tax credits as of Aug. 22, and about 60 percent of them had adjusted gross income of less than $50,000, according to a Government Accountability Office report also released Thursday.

Stiff said all those claims have been resubmitted through a computer filter designed to catch potential problems. As a result, the IRS has identified more than 160 potential tax credit schemes that have resulted in scores of criminal investigations, and the agency has selected for reexamination 107,000 claims, some of which have been frozen.

"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.

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