Fraud continues to plague homebuyer program

Iron bars might keep prisoners from physically picking our pockets. But that’s not enough to keep them – and others – from stealing millions in taxpayer money through fraudulent first-time homebuyer tax credits.

In spite of previous efforts to tighten up fraud connected with the homebuyer assistance program, another 14,132 bogus credits have been paid out worth at least $26.7 million. According to a recent report by the Treasury Inspector General for Tax Administration (TIGTA), those totals include $9.1 million in credits given to people in prison at the time they claim to have been house shopping. These individuals did not file joint returns, so the claims could not have been the result of purchases made by their spouses.
 
Of the credits paid to prisoners, 241 went to inmates serving life sentences – even though, to qualify, the purchased home must be the taxpayer’s primary residence. A statistical sample showed that 74 percent of the prisoners who received erroneous credits already were incarcerated by 2007. The homebuyer credits didn’t become available until April 2008.
 
TIGTA noted that prisons voluntarily supply the Internal Revenue Service with a list of prisoners each year. However, TIGTA added, this problem arose because the IRS did not start matching the database of U.S. prisoners with filed tax returns until May 2009, more than a year after the start of the homebuyer credit program.
 
This isn’t the first time TIGTA has raised concerns about the administration of these credits. Last it reported that $636 million had been paid out inappropriately.
 
"Steps taken by the IRS prior to the 2009 filing season were not sufficient to prevent waste, fraud, error, and abuse," TIGTA Inspector General J. Russell George said at the time. "The IRS should immediately implement TIGTA's recommendations in order to prevent further fraud and abuse of First-Time Homebuyer Credits."
 
Key among those recommendations made in November 2008 was the need for the IRS to use information that taxpayers themselves provided when seeking the credit. TIGTA also recommended that the IRS require taxpayers to provide documentation to verify the purchase of the home that generated the credit. The IRS disagreed with both of these recommendations, stating that the agency had other strategies in place to mitigate the losses.
 
Other issues
 
The problems noted in the most recent TIGTA report were not limited to prisoners receiving bogus credits. Here are some of the key concerns revealed in the study:
  • For the population in general, 2,555 credits worth $17.6 million were paid out for homes purchased prior to the dates allowed by law (April 8, 2008 and April 30, 2010). Eighty-seven of those credits were claimed by IRS employees.
  • TIGTA found 10,282 incidents where taxpayers claimed the credits for the purchase of homes that also were used by other taxpayers. In one case, 67 taxpayers received credits for a house with the same address.
  • 18,832 taxpayers filed claims for the homebuyer credit using only 7,695 addresses. Those claims represented $134 million. A statistical sample showed that the majority of those credits were paid without IRS scrutiny.
 
“This is very troubling,” George said in a statement. “Congress created and modified the homebuyer credit to stimulate the economy and help taxpayers achieve the American Dream, not to line the pockets of wrongdoers.”
 
TIGTA also noted that some of the previous tax credit abuses have been reduced by IRS actions.
 
“The good news is that the IRS has made significant strides resolving problems associated with this program," said George. "For example, no minors received the credit, according to our report. However, the bad news is that prisoners are allegedly improperly receiving the credit for buying homes while they are incarcerated. While the IRS has taken a number of positive steps to strengthen controls and help prevent inappropriate credits from being issued, our audit found that additional controls are necessary to address erroneous claims for the credit.”
 
The IRS responded to information in TIGTA’s report by saying: "In swiftly making the First Time Homebuyer Credit immediately available to more than 2.6 million homebuyers, a very small number of payments were made to prisoners incorrectly, which the IRS is now taking all steps to recapture and to prevent going forward. The IRS will follow up on every instance of an improper prisoner payment and take swift and appropriate enforcement actions."
 
In addition, the IRS stated that Congress needs to pass legislation making it possible for the tax agency to receive reliable information on all federal, state, and local prisoners.
 
TIGTA recommendations, IRS responses
 
Payment of credits to prisoners
Recommendation 1: The appropriate divisions within the IRS need to take steps to ensure prisoner files are accurately reconciled from year to year, making sure that names are not wrongly deleted from the list. In response, the IRS management agreed to enhance the accuracy and completeness of its prisoner files. The IRS has shifted the responsibility for this task to the Wage and Investment Division.
 
Recommendation 2: The appropriate divisions within the IRS should ensure that steps are taken to recover fraudulent homebuyer credits refunded to prisoners. The IRS agreed, stating that various divisions within the tax agency will work together to conduct post-refund examinations on prisoners who received inappropriate payments. These refunds will be given high priority and possibly be referred for criminal investigation.
 
Multiple credits paid on the same house
Recommendation 3: The appropriate divisions within the IRS should use a procedure similar to the one TIGTA ran, to identify multiple taxpayers claiming the same home for the homebuyer credit. In addition, the IRS should perform post-refund examinations to ensure refunds for the invalid claims are recovered. TIGTA stated it will provide the IRS with a list of taxpayers who fall into this category upon request. The IRS agreed and identified this as an important element of the overall examination plan. These returns will be included in the pool of potential post-refund audit work.
 
Regarding the payment of credits allowed for homes purchased prior to the dates allowed
Recommendation 4: The appropriate divisions within the IRS should identify the claims that fall into this category and initiate post-refund examinations to ensure recovery of invalid claims. TIGTA has stated it has a list of taxpayers described above and will make it available to IRS functions upon request. The IRS agreed. The agency will identify claims for home purchases made before the appropriate date, and will reverse the credits or adjust the taxpayer accounts to reflect correct information, depending on the information supplied by the taxpayer.
 
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