Before Congress votes to extend or expand the popular First Time Homebuyer Credit (FTHBC)… they might want to take a look at the report just out from the Treasury Inspector General for Tax Administration (TIGTA). The purpose of the report was to determine whether there were “controls in place that effectively identify erroneous claims for the credit.” The answer… a resounding “no.” In fact, this short-lived credit has already racked up bogus payouts in the neighborhood of $636 million.
Here are a few highlights of the report.
- 582 credits were claimed by individuals under age 18, the youngest of whom was four years old.
- For 2008 alone, 19,351 returns were electronically filed for houses that were not yet purchased, even though the regulations stipulate that the purchase must be complete. These credits amount to nearly $140 million. It is not yet known how many paper returns were filed for purchase that were not completed.
- 73,799 credits had been claimed, as of July 25,2009, by people who had information on their 2008 tax returns that could indicate they do not qualify as first time home buyers- – such as real estate taxes, mortgage interest, mortgage insurance premiums, and energy credits -- in one or all of the last three years. Credits inappropriately paid out to ineligible buyers totaled roughly $504 million.
The mechanics of the First Time Home Buyer’s Credit
As part of George Bush’s 2008 Housing and Economic Recovery Act, Congress originally created the credit to help boost the housing market. Taxpayers who purchased homes between April 8,2008 and July 1,2009 could qualify for a credit of up to $7,500, which was to be paid back. Later Barack Obama’s 2009 American Recovery and Reinvestment Act raised the maximum credit to $8,000 extended the deadline to November 30, 2009, and removed the requirement to pay back the credit. Now, Congress is debating whether to nearly double the credit and push the deadline into next year.
In order for taxpayers to claim the credit, the IRS created Form 5405. This form was designed with controls that were intended to prevent certain errors, including:
- Claims in excess of the maximum allowable Credit.
- Claims in excess of allowable amounts for those taxpayers with Adjusted Gross Income exceeding income limitations.
- Claims without a Form 5405 attached.
While TIGTA admits in its report that these controls are effective, they obviously don’t go far enough and do not prevent an individual who is not qualified from claiming and receiving a credit. TIGTA’s report pointed out at least two significant problems with the process the IRS employed.
- Although there was information on the Form 5405 that could have been used to verify eligibility, such as the date of purchase and location of the house, this information was not keyed into IRS computers.
- The IRS does not require taxpayers to attach documentation to tax returns claiming the credit, such as a HUD-1 Form (from the federal Department of Housing and Urban Development) that would verify the date of purchase, the residence address, and the purchase price.
Both of these actions, which were recommended by TIGTA in November 2008, could have prevented the paying of bogus credits. At that time, the Internal Revenue Service rejected the TIGTA’s findings, stating instead that other strategies would be put in place to mitigate the problems TIGTA anticipated.
In addition, the report indicates that the IRS declined to take TIGTA’s recommendations because:
- The tax agency was given authority by Congress to pay the credits, but not to require documentation of an actual, qualifying home purchase.
- Requiring documentation would preclude people from filing electronically.
- The IRS doesn’t have “math error authority” to disallow a credit during processing, based on incorrect math in the application.
As a result, TIGTA holds the IRS at least partially responsible for the massive payout of bogus credits. "Steps taken by the IRS prior to the 2009 filing season were not sufficient to prevent waste, fraud, error, and abuse", said TIGTA Inspector General Russell George in a statement. "The IRS should immediately implement TIGTA's recommendations in order to prevent further fraud and abuse of First-Time Homebuyer Credits.
While TIGTA acknowledges that the IRS does not have the authority to require documentation, its report points out that the tax agency does have the authority to conduct post-refund audits, and encourages the tax agency to do so.
In defending her agency, Linda Stiff, the IRS Deputy Commissioner for Services and Enforcement said, “In administering the FTHBC program, the IRS has undertaken significant outreach to ensure that taxpayers are aware of the benefit, developed new forms and instructions to allow taxpayers to file the claim, and instituted significant compliance programs to ensure that those claims are valid. As with any tax credit, the IRS must run a balanced program aimed at delivering the benefits that the legislation provides, while ensuring that appropriate controls are in place to minimize errors and fraud.”
TIGTA has suggested that Congress needs to provide the IRS with “math error authority” that would allow the tax agency to correct certain errors during credit processing, and avoid the need for a post-refund, labor intensive audit. Specifically, TIGTA suggested that Congress grant math error authority to use the taxpayer information provided in a tax return to automatically verify certain aspects of compliance.
While debate continues about the possible expansion and/or extension of the home buyer’s credit, at least one congressperson is attempting to plug the cash leaks before more inappropriate refunds are paid out. Rep. John Lewis (D-GA) has introduced legislation designed to increase the authority of the IRS to filter out potential bogus claims and require documentation to support claims for the credit.