The federal homebuyer tax credit can be considered a great boon to the housing market and the economy, or as a phenomenal waste of tax dollars. The watchdogs over at the Internal Revenue Service have taken another look at the credits. While they say there is reason for encouragement about the processing, the overseers are not happy.
In prior examinations, the Treasury Inspector General for Tax Administration (TIGTA) has pointed out numerous areas that needed to be addressed. In a recent TIGTA audit, it notes that the tax agency has made some progress in the tracking of credits.
"The IRS is to be commended for its efforts to not only implement but also enforce the laws governing the First-Time Homebuyer Credit program", said J. Russell George, the Treasury Inspector General. "Going forward, it is imperative that the IRS ensure the comprehensive strategy being developed identifies taxpayers who erroneously or inappropriately received the credit and are required to repay it."
In its report, TIGTA also identifies significant problems that remain. One key issue that has caused tremendous concern is the inability of the IRS to distinguish between houses that were purchased in 2008 versus 2009.
Why is this critical?
You may recall that the 2008 program under then-President George W. Bush was a first-time homebuyer tax credit for up to $7,500, and that credit had to be repaid with annual payments over a 15-year period. The 2009 program under President Barack Obama did not require repayment, and was for a maximum of $8,000.
The TIGTA audit revealed that during 2009, approximately 1.77 million credits were applied for. Of those, a large number of the credits – 73,119 were paid out – despite the fact that the related IRS records showed either no purchase date or an incorrect purchase date.
- 59,802 recipients who purchased homes in 2009, but were recorded by the IRS as having made the purchases in 2008, or show no purchase date
- 9,122 who made the actual purchase in 2008, but IRS records show 2009
- 4,195 claims either listed no purchase date, or the purchases were made prior to the beginning of the first program in 2008
“These claims should not have been processed,” the auditor noted.
In addition, 514,987 requests for credits showed purchase dates, but the dates were unverifiable because the data was not captured by the tax agency.
As part of the tax credit process, Congress included provisions to recapture or accelerate repayment of credits for those taxpayers who did not ultimately meet the requirements of the credit. However, the audit found that the IRS lacked the systems needed to enforce the recapture and repayment rules.
Specifically, regulations stipulate that recipients of the 2008 repayable credits who sold the related homes before the end of that 15-year payback period must immediately return the credit when they filed a tax return for the year of the sale.
Regarding the 2009 credits, recipients who sold the related homes within three years of purchase were to repay the credit with a tax return filed for the year of sale.
The problem, according to TIGTA, is that the IRS has no method for tracking premature sales and, instead, relies on the honor system. That is, the only way the IRS knows if a house has been sold prematurely is if the taxpayer self-reports the sale.
The auditor did note that the IRS is working on a system of third-party reporting to track these sales from such sources as real estate agents.
Bypass recapture and repay
Recapture and repayment is not required under certain circumstances, including:
- Death of the homeowner
- Foreclosure of the property where there is no gain to the taxpayer
- Extended overseas duty for members of the military, and others if the extensions prevent the homeowners from residing in their homes
Auditors found, however, that the IRS has no system in place to identify and process these exceptions.
Other issues identified in the TIGTA audit:
In the 2008 credit program, $10.1 million in credits were paid out to 1,326 individuals – each of whom had died before the date of the home purchase.
- 528 of these were denied (totaling approximately $4 million), but the remaining 798 were paid
- 951 of the individuals whose Social Security numbers were used had passed away at least six months before the date of purchase
TIGTA reported that the IRS has agreed to audit the tax returns of the 798 individuals who received credits improperly.