US Congress To Stamp Out Tax Credit Abuse

by Leroy Baker, Tax-News.com, New York

27 October 2009

Legislation has been introduced into the United States Congress to improve the Internal Revenue Service’s (IRS) administration of the first-time homebuyer tax credit, in a bid to reduce the number of fraudulent claims.

The bipartisan bill was introduced into the House of Representatives by Ways and Means Committee Oversight Subcommittee Chairman John Lewis, in direct response to testimony during an October 22 hearing to discuss administration of the credit and examine potential abuses uncovered by the IRS and Treasury Inspector General for Tax Administration (TIGTA).

The first-time homebuyer credit was included in the Housing and Economic Recovery Act of 2008. For homes purchased in 2008, the credit operates like an interest-free loan because it must be repaid over a 15-year period.

However, the credit was expanded in 2009 for homes purchased in 2009, increasing the amount of the credit and eliminating the requirement to repay the credit, unless the home ceases to be the buyer's principal residence within a 36-month period.

The credit is 10% of the purchase price of the home, with a maximum available credit of USD7,500 (USD8,000 if the home was purchased in 2009) for either a single taxpayer or a married couple filing a joint return, but only half of that amount for married persons filing separate returns.

The full credit is available for homes costing USD75,000 or more (USD80,000 if purchased after December 31, 2008, and before December 1, 2009).

As of October 9, 2009, more than 1.2 million tax returns claiming almost USD8.5 billion in first-time homebuyer credits had been processed by the IRS.

However, according to testimony from J. Russell George, Inspector General of TIGTA, more than 19,300 electronically filed 2008 tax returns claimed the first-time homebuyer credit for a home which had not yet been purchased, but allegedly would be in the future.

The law requires that a home be purchased before the credit may be claimed. These claims totaled more than US139m. The number of paper returns with similar claims has not yet been determined.

According to the law, claimants must show that they have not have not owned a home in the three years prior to making a claim. However, TIGTA identified almost 74,000 First-Time Homebuyer Credit claims totalling more than USD500 million, that were claimed by taxpayers who had indications of prior home ownership within the preceding three years in contravention of the legislation. While these entries indicate home ownership, the homes involved may or may not have been the taxpayers’ principal residences, so the deductions do not automatically disqualify the taxpayers from receiving the First-Time Homebuyer Credit.

In addition, TIGTA identified more than 580 taxpayers younger than 18 years of age who claimed almost USD4 million in First-Time Homebuyer Credits. The youngest taxpayers receiving the Credit were four years old.

According to Lewis, the Homebuyer Tax Credit Improvement Act would improve administration of the credit and prevent abuse by requiring a minimum age of 18 to claim the credit; requiring that taxpayers attach a copy of documentation to prove that they purchased a home; providing the IRS with the authority to look at prior year returns and determine if a taxpayer is eligible for the credit; and improving tax administration by increasing the number of electronic returns filed by return preparers.

“This legislation will help ensure that the IRS has the tools and authority it needs to prevent abuse of this credit,” explained John Lewis.

“This tax credit is an important resource for families seeking to purchase a home and a vital part of our economic recovery efforts. We must ensure that we are administering the credit accurately and strike a balance between issuing timely refunds of the credit and protecting federal resources. I look forward to working with my colleagues to move this legislation forward.”

Linda E. Stiff, Deputy Commissioner for Services and Enforcement at the IRS told the hearing that the agency has already opened up "scores" of criminal investigations involving homebuyer tax credit fraud and will "vigorously pursue" those who filed fraudulent claims for the credit.

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