IRS Wrongly Gave Homebuyer Tax Credit to Resident Aliens, Minors: Watchdog
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.