Inspector Cites Widespread Fraud in Home-Buyer Tax Credit

Even as support grows in Congress for an expansion of the soon-to-expire $8,000 first-time home-buyer tax credit, a Treasury Dept. inspector told lawmakers on Oct. 22 that illegal immigrants, children as young as age 4, and thousands of others might have illegally received payments.

The credit, which is limited to buyers who have not owned a home for the past three years, is due to expire Nov. 30. But several bills to extend the credit have been introduced, including one co-sponsored by Senate Banking Committee Chairman Chris Dodd (D-Conn.) that would extend the credit to June 30, 2010, and expand it to include buyers who previously owned homes.

About 1.4 million borrowers have claimed a total of about $10 billion in credits through the program, which was approved in February. But 19,351 people who filed electronic tax returns for the 2008 tax year claimed credits of more than $139 million for homes that had not yet been purchased, J. Russell George, U.S. Treasury Inspector General for Tax Administration, told the House Ways & Means Committee.

It's unclear how many paper returns had similarly inappropriate claims, he said. George said another 70,005 taxpayers appear to be previous homeowners based on their returns, which included mortgage interest, real estate taxes, and other home-related items. And more than 580 taxpayers under age 18 claimed nearly $4 million in credits, including some 4-year-olds. George suggested that their parents might have been trying to get around income restrictions (the full credit is available only to single taxpayers earning up to $75,000 and couples earning $150,000).

IRS Freezes 10,000 Refunds George said that he's concerned about the IRS' ability to "effectively administer" the applications for tax credits being claimed before the existing deadline, "let alone those claimed before future deadlines" if the credit is extended.

Linda Stiff, the IRS deputy commissioner for services and enforcement, said the tax credit went into effect in February during the busy tax season and it took time to develop filtering mechanisms that were later put in place to catch questionable claims.

The IRS has frozen 10,000 refunds pending audits, identified 167 criminal schemes, and launched 115 criminal investigations relating to suspicious claims.

The reported fraud in the system comes when the fate of the tax credit is still uncertain. Mark Zandi, chief economist for Moody's (MCO), said allowing the tax credit to expire would be a serious mistake even though it is "one of the least efficient ways" the government has to support the housing market.

According to Zandi, only about 400,000 additional homes will sell because of the credit by the time it expires. And about 1.8 million buyers will have claimed the credit. Expanding the credit to include previous homeowners and extending the credit through June will cost about $30 billion, on top of about $8 billion that would have already been spent.

"The market is literally on life support—it's fragile," Zandi said. "If we take it off, we risk taking a big step back."

Reelection Politics Jaret Seiberg, policy analyst with Concept Capital's Washington research group, said the fraud that was uncovered isn't enough to stop the extension, which has strong bipartisan support, particularly from lawmakers in districts where home prices are plunging.

Senate Majority Leader Harry Reid, who is facing a difficult challenge in his home state of Nevada, co-sponsored a bill to extend the existing credit by six months. Dodd, another strong supporter, is also facing reelection in Connecticut in 2010.

"The Inspector General's report is going to force Democrats to include more safeguards in the extension," Seiberg said. "But it doesn't change the underlying politics. Incumbents in both parties need it enacted to get reelected."

Senator Johnny Isakson (R-Ga.), who is co-sponsoring the extension with Dodd, said that the problem tax returns represent a small fraction of those who received the credit and his bill will include measures recommended by the Treasury Inspector General and the IRS to minimize fraud in the future. Among the proposed safeguards: a requirement that borrowers attach documents verifying that they purchased the home and proof of age of the claimant. "Any fraud is unacceptable," Isakson, a former Realtor, said. "Nobody is against stopping fraud."

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