Congress scrutinizes fraud in first-time homebuyer credit

Scamming the system? From the Associated Press
Tens of thousands of people may have taken advantage of the first-time home buyer tax credit to defraud the government, an IRS watchdog office said Thursday, in testimony that could jeopardize efforts to extend the popular program.

Treasury Inspector General for Tax Administration J. Russell George told a House panel that more than 19,000 people filed 2008 tax returns claiming the credit for homes they had not yet purchased. Russell said his office had identified another $500 million in claims, by some 74,000 taxpayers, where there were indications of prior home ownership.

He told a House Ways and Means oversight subcommittee that they also found 580 taxpayers under the age of 18 who claimed $4 million in first-time home buyer credit. One was 4 years old.

George said that while the IRS has since taken steps to tighten oversight, “some key controls were missing to prevent an individual from erroneously or fraudulently claiming the credit.”

The home buyer credit was a key element of the $787 billion stimulus package enacted last February. Under the measure, low- and middle-income first-time home buyers purchasing a home between Jan. 1 and Nov. 30 of this year could claim a credit of up to $8,000 on their 2008 or 2009 income tax return.

The Internal Revenue Service says it has processed claims from more than 1.5 million individuals or families. The General Accountability Office, in a report to the subcommittee, said that represented about $10 billion in tax revenue.

With the program scheduled to expire in a month and the housing market’s recovery still shaky, there have been various proposals in Congress to extend and expand it.

At one end, House Majority Leader Steny Hoyer, D-Md., says the program should be extended for a month while lawmakers take another look at how it is being run. On the other end, Sen. Johnny Isakson, R-Ga., with the backing of banking committee chairman Christopher Dodd, D-Conn., wants to extend it through next June 30, and expand it to include all home buyers, at an estimated cost of $16.7 billion.

Housing and Human Development Secretary Shaun Donovan, in testimony to Congress earlier this week, was noncommittal, saying the administration understands the urgency of the housing situation but wants to get a better grasp of the costs involved.

Linda Siff, IRS’ deputy commissioner for services and enforcement, said in testimony to the hearing that the agency “recognizes that there is potential for both fraud and errors” when a new tax credit is enacted. She said the agency “will vigorously pursue those who filed fraudulent claims.”

As of the end of September the IRS, according to the GAO report, has frozen more than 110,000 refunds pending civil or criminal examinations, identified 167 criminal schemes and commenced 115 criminal investigations.

Russell said the IRS has implemented computer programming to reject claims from people who have not yet purchased a new home. He also acknowledged that the agency has installed filters to catch claimants who had entered information on tax returns indicating they may have owned a home in the three previous years. Those could include deductions for home mortgage interest or real estate taxes.