The Treasury Inspector General for Tax Administration (TIGTA) believes the Internal Revenue Service (IRS) may have paid out millions of dollars in first-time homebuyer tax credits to individuals not eligible to receive the $8,000 credit.

Nearly $4m of incorrectly paid credits were due to both alleged fraud and filing errors on claims by 580 taxpayers less than 18 years old. The youngest of these was 4 years old, TIGTA head J. Russell George said in prepared testimony to the House Ways and Means Oversight subcommittee.

TIGTA also found 3,200 taxpayers with Individual Taxpayer Identification Numbers (ITIN) claiming the credits. ITINs are generally used to track income tax for resident aliens, in lieu of a social security number.

While the legislation creating the tax credit does not specifically address resident alien eligibility, other laws prohibit aliens residing without authorization in the US from receiving most federal public benefits, George said. It is possible that as much as $20.8m in tax credits were paid to resident aliens ineligible for the credit.

As of August 22, 2009, more than 1.4m taxpayers claimed the tax credit for homes purchased in 2008 and 2009, representing total foregone tax revenue of about $10bn, according to estimates presented by Government Accountability Office (GAO) director of strategic issues James White.

While the tax credit was created, the IRS created Form 5405, the documentation homebuyers must complete to claim the credit, and implemented checks on the claims system to detect those in excess of the maximum allowable credit or allowable amounts for those taxpayers with a gross income above the credit’s income limitations and claims filed without Form 5405.

But shortly after the IRS began administering the tax credit, the TIGTA office suggested additional fraud and error reporting measures, like requiring taxpayers submit a copy of their Department of Housing and Urban Development (HUD) Settlement Statement, known as the HUD-1 form. TIGTA also recommended verifying the information on Form 5405 and manually transcribing paper versions of Form 5405.

The IRS rejected both proposals, saying requiring the HUD-1 form would be burdensome to taxpayers and may deter them from taking the credit. IRS also indicated the tax credit was approved too late to manually transcribe the paper Forms 5405.

As a result of the IRS’ decision to not implement the additional checks, George said, more than 19,300 electronically filed 2008 tax returns improperly claimed the tax credit for homes that had yet to be purchased at the time of the tax filing. He said more than $139m in erroneous claims were paid to these individuals.

Linda Stiff, IRS deputy commissioner for services and enforcement, said in prepared testimony that when the tax credit was created, it came in the middle of an already hectic tax season and put a strain on the department.

“It was important that the IRS implement and administer the [tax credit] in a way that did not disrupt the annual tax return filing process,” she said.

Stiff added the IRS is pursuing fraud cases and already selected thousands of returns of individuals claiming the credit for civil examination. She also indicated that until the IRS can follow up with individuals with questionable returns, it is impossible to determine whether the claim is fraudulent or not.

“We will vigorously pursue those who filed fraudulent claims for this credit, but we also will seek to respect the rights of taxpayers who claim a credit to which they are lawfully entitled,” Stiff said.

George said his office also identified nearly 74,000 fraudulent claims for the tax credit by individuals who did not qualify because they were not considered first-time homebuyers. These individuals claimed deductions of home mortgage interest, real estate taxes, deductible points and qualified mortgage insurance premiums on previous years’ tax returns, indicating they had owned a home within the past three years.

On the other hand, George said his office identified about 48,500 taxpayers who did not file claims for enough of the tax credit. These taxpayers claimed $7,500 (the credit value when the incentive became available in 2008) for the 2009 credit, when the maximum is $8,000. Unless these taxpayers bought $75,000 homes, they are entitled to higher tax credits, George said.

The GAO and TIGTA recommended Congress consider granting the IRS additional authority to assess taxes to those with incorrect homebuyer tax credit information. It is a streamlined process for minor errors on tax returns that eliminate the need for full audits when borrowers make a simple mistake on tax returns. The IRS has “math error authority” on some matters, but Congress must grant it for specific items, like the tax credit.

Write to Austin Kilgore.

[Update 2 clarifies intent of Miller amendment.]

House of Representatives lawmakers approved a bill that establishes a regulating agency for financial products marketed and sold to US consumers. The legislation also seeks to "sunset" a current regulation on the way house appraisals are ordered.

The House Financial Services Committee continued this week to consider sweeping financial regulatory reform as it marked up and approved by a voice vote HR 3126, the Consumer Financial Protection Agency (CFPA) Act.

The Committee considered a number of amendments to curb the authority of the agency, including a measure to remove "plain vanilla" language from the Administration's initial proposal that would require only basic types of financial products to be marketed and sold.

Committee chairman Barney Frank (D-Mass.) for weeks opposed "plan vanilla" requirements, which are removed from the legislation by a key provision supported by House Democrats.

The Committee also approved by voice vote an amendment that would ultimately retire the Home Valuation Code of Conduct (HVCC), the set of standards on ordering appraisals for house purchases that took effect May 1.

The provision, introduced by Rep. Gary Miller (R-Calif.), is part of an effort to call on regulators to streamline existing appraisal independence rules into one set of standards. Regulators could then "sunset" and retire the HVCC, according to a statement from Rep. Miller's office.

“While I am supportive of ensuring accurate appraisals, I have repeatedly expressed concern that the HVCC has potential to increase costs to consumers, significantly hinder a consumer’s ability to obtain legitimate and reliable appraisals, and adversely impact small business professionals who work in the very neighborhoods where these consumers are looking to purchase homes,” Rep. Miller said.

“In fact, since the implementation of the HVCC on May 1," Miller added, "there are numerous examples of higher costs for appraisals, poor service, the inability to use one appraisal for more than one lender, questionable quality of appraisals, and the inability to make corrections to inaccurate information on an appraisal report.”

The Miller amendment calls on the CFPA to revamp appraisal independence rules and ultimately put an end to the confusion around HVCC and its effect on appraisals and the housing market. The HVCC would become ineffective on the day the CFPA completes a rule-making process to establish standard codes for appraisal independence.

The House panel approved HR 3126 in a 39 to 29 vote. Having cleared a major hurdle, the bill moves on for consideration by the full House.

Write to Diana Golobay.

Long-term mortgage rates increased this week as consumers continue to seek the stability of fixed-rate mortgages, according to a weekly survey from mortgage giant Freddie Mac (FRE: 0.00 N/A).

The 30-year fixed-rate mortgage averaged 5% with an average 0.7 point for the week ending Oct. 22, up from last week when it averaged 4.92%. Last year, the 30-year FRM averaged 6.04%.

The 15-year FRM averaged 4.44% with an average 0.6 point, an increase from last week as well when the rate averaged 4.37%. A year ago, the 15-year FRM averaged 5.72%. The five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.40% this week with an average 0.6 point, a jump from last week’s average of 4.38% but still below the 6.06% from a year ago.

The one-year Treasury-indexed ARM averaged 4.54% with an average 0.6 point, slipping from last week when it averaged 4.38% and last year’s average of 6.06%.

Frank Nothaft, the vice president and chief economist at Freddie Mac, said that the housing market is still trying to recover in the second half of 2009, and the Federal Reserve reported in its regional economic review an improvement in housing market conditions.

A separate weekly survey conducted by Bankrate.com, which tracks large US banks and thrifts, placed the average 30-year FRM at 5.34%, up from 5.32% last week and down from 6.32% a year ago.

The 15-year FRM also increased to 4.72% from 4.70% last week, but the five-eye ARM rate averaged 4.69%, sinking from 4.76% last week.

Write to Jon Prior.

If the first-time homebuyer tax credit is extended beyond its current Nov. 30 expiration, Rep. Charles Boustany Jr. (R-LA) said he wants to see it paid for before it’s approved.

Boustany, the ranking member of the House Ways and Means Oversight subcommittee, told HousingWire the impact of the credit’s benefits must be weighed against potential fraud.

“If we go forward and extend the program, we need to make sure IRS can adequately monitor and enforce the program to maintain its integrity,” Boustany said. “One of the things I would consider would be looking at reprogramming some of the stimulus money that has not been used, but I would not want to do this without having it paid for.”

The Oversight subcommittee is conducting a hearing Thursday morning to examine the issue of fraud related to the tax credit. The Internal Revenue Service (IRS) opened more than 100,000 civil examinations of potential fraud related to the credit. The subcommittee also considered opportunities to enhance the administration of the tax credit during the 2010 tax-filing season.

“There is some suggestion that refundable tax credit might be a little bit more difficult to administer against fraud because you’re talking about cash transfers,” Boustany said. “We have information on how many people have taken advantage of the tax credit, but we have to balance that against the level of fraud that’s occurred with this.”

On Monday, a trio of real estate trade associations submitted a letter to government leaders calling for the extension and expansion of the tax credit.

Write to Austin Kilgore.

A federal judge denied a Justice Department request to issue a temporary restraining order against Ideal Mortgage Bankers, parent company of Lend America, that would have prevented the lender from originating Federal Housing Administration (FHA)-insured loans.

The judge's denial comes after the Justice Department, on behalf of the Department of Housing and Urban Development (HUD), filed a civil suit this week against Ideal. The suit alleges Ideal improperly certified borrowers for more than $14m in FHA-insured mortgages.

In a press statement, Ideal Mortgage Bankers said: “Lend America is pleased to announce that today the court denied the Government’s request for an order prohibiting Lend America from originating FHA insured loans."

Ideal added: "We look forward to continuing our partnership with HUD and our mission of providing affordable financing for those borrowers in need.”

A spokesperson for the US attorneys office handling the case declined comment.

Write to Austin Kilgore.