IRS Rejected $1.6 Billion in First-Time Homebuyer Credits

The U.S. Internal Revenue Service rejected $1.6 billion in erroneous claims for the first-time homebuyer tax credit, according to a report by the Treasury Inspector General for Tax Administration.

The refundable tax credit, worth as much as $8,000, was available to first-time homebuyers who made purchases in 2008, 2009 and 2010. As of July 30, 2011, the IRS processed 4.3 million claims for the credit totaling almost $30.4 billion, according to the inspector general’s report.

The report was issued today as a follow-up to a 2009 audit by the inspector general that said the IRS didn’t do enough to prevent fraudulent claims for the credit. More than two years later, the IRS is still falling short, the report said.

“Examination resources could have been used more effectively,” according to the report.

The inspector general said the IRS didn’t implement filters to detect potential fraud related to the credit until after the agency had processed more than 1.1 million claims. Of those claims, the IRS went back and found that 250,159 were “questionable.” The watchdog said the IRS audited 69,953 of the claims -- fewer than a third -- because it decided it didn’t have the resources to review all of the questionable claims.

Many of the 180,206 suspicious claims the IRS didn’t audit posed a higher risk of error than the 69,953 it reviewed, the report said.

Implementation of the credit “presented significant administrative challenges,” Peggy Bogadi, IRS commissioner for the wage and investment division, wrote to the inspector general in response to the report. “As with any new process, valuable lessons were learned as we implemented and refined our strategy for detecting and addressing questionable claims.”

To contact the reporter on this story: Steven Sloan in Washington at ssloan7@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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