IRS Allowed $513 Million Worth of Bogus Homebuyer Credits

First-Time Homebuyer Credit Review: Increased IRS Controls Needed Over All Refundable Credits

real estate investingThe Internal Revenue Service needs to strengthen its controls over all refundable tax credits, according to the Treasury Inspector General for Tax Administration (TIGTA).

TIGTAs recommendation came in the last of a series of three reports on the IRSs implementation of the First-Time Homebuyer Credit Homebuyer Credit. The report concluded that the IRS did not ensure appropriate controls were established before initiating the processing of claims for the Homebuyer Credit.

As a result, taxpayers received some $513 million in Homebuyer Credits for which they most likely did not qualify.

Homebuyers who purchased a home in 2008, 2009, or 2010 were able to take advantage of the Homebuyer Credit allowing eligible taxpayers to claim up to an $8,000 refundable credit on their tax return. TIGTA reviewed whether the IRS had controls in place that effectively identified erroneous claims for the Homebuyer Credit.

An absence of filters to identify questionable claims for the Credit before they were processed is blamed, along with the lack of any requirement for documentation to substantiate the purchase of a home. The implementation of these filters and passage of legislation authorizing the additional requirements occurred after many fraudulent and erroneous Homebuyer Credits had already been issued. Reviewers discovered a filter designed to catch taxpayers who claimed the credit, but did not report a change of address, was not functioning.

The IRS has taken positive steps to strengthen controls and help prevent the issuance of inappropriate Homebuyer Credits, said J. Russell George, the Treasury Inspector General for Tax Administration. However, many of the actions occurred after hundreds of thousands of Homebuyer Credits had already been issued, including fraudulent and erroneous Credits totaling millions of dollars.

The IRS needs to take a much more timely and proactive approach to prevent fraudulent claims for refundable credits, he added.

TIGTA made seven recommendations to the IRS, including: requiring taxpayers to provide supporting documentation to verify eligibility for all refundable tax credits and seeking legislation providing the IRS with math error authority to deny refundable credits when supporting documentation is not provided. The IRS generally agreed with TIGTAs findings. However, TIGTA believes that the IRSs corrective actions will not be proactive enough to prevent fraudulent claims for refundable credits.

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