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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, November 8, 2009 First-time homebuyer credit invites tax cheats By Tom Kelly How does a 4-year old get approved for an $8,000 first-time homebuyer tax credit? While Realtors, lenders, appraisers, home inspectors, escrow officers and every other professional service connected to home sales and financing were lobbying for an extension of the first-time homebuyer housing credit, a recent audit revealed thousands of fraudulent claims — such as several involving 4-year-old buyers — and a need for more safeguards to support the popular program. The program was extended and expanded by Congress last week, so let’s hope it gets more scrutiny now. It’s disheartening that problems would surface in the one plan that is housing’s primary driver, but I guess the fraud disclosure should not come as a surprise. Mortgage scams have been in the news. And we are just now getting an indication of how many consumers are willing to participate — especially if they think there is a chance the Internal Revenue Service will not discover their creative maneuvers. The goal of the recent audit conducted by the Treasury Inspector General for Tax Administration was to determine whether the IRS had controls in place that effectively identified erroneous claims for the tax credit. It developed computer programs to identify 73,799 buyer credits attached to returns totaling almost $504 million that were claimed by taxpayers who had indications of prior home ownership within three years. According to the audit, the 73,799 taxpayers had entered information on their individual income tax returns for one of the prior three years indicating they may have owned a home. These entries included deductions for home mortgage interest, real estate taxes, deductible points, and qualified mortgage insurance premiums. While the IRS adopted controls to identify many questionable claims for the credit, some key controls were missing, according to the inspector. Missing from the suggested safeguards was information provided on the form to verify eligibility requirements. In addition, taxpayers were not required to provide documentation that they actually purchased a home. The law defines a first-time buyer as any individual (and spouse, if married) who had no ownership interest in a principal residence during the three-year period prior to the home purchase. According to the audit summary, inspectors identified 19,351 tax year 2008 electronically filed tax returns on which taxpayers claimed credits totaling over $139 million for homes that had not yet been purchased. If that revelation wasn’t absolutely mindboggling, then the discovery of 4-year-old claimants takes the cake. In the words of the audit writers: “Through July 25, 2009, we identified 582 taxpayers under 18 years of age who claimed almost $4 million in first-time homebuyer credits. The youngest taxpayers receiving the credit were 4 years old. Contract law generally exempts children under the age of 18 from being bound by the terms of a contract. Therefore, it is unlikely that these taxpayers would have entered into an arms-length transaction for the purchase of a home.” Approximately 28 percent of the 582 taxpayers under age 18 that were identified did not meet the IRS income screening criteria. In 64 of these cases, other IRS filters flagged the claim for further scrutiny. However, 101 of the claims (totaling $626,779) made by children under the age of 18 did not meet any of the IRS screening criteria. According to the audit, the IRS believed that its filters identifying taxpayers claiming the credit who had adjusted gross Incomes below certain levels would catch the questionable claims. While many taxpayers will be identified by recently implemented IRS filters and are subject to pre-refund audits, the inspectors identified 70,005 taxpayers whose tax returns were processed prior to the implementation of the filters. Clearly, the IRS underestimated the need for basic first-time homebuyer safeguards in the credit program — and probably the popularity of the program itself. Now it will get another chance to redeem itself. The first-time buyer program has been extended until April 30. Buyers who make a deal by then will have until June 30 to close and received the $8,000 credit. The program was also expanded to include people who have owned a home for five years and are buying a new one. They have the same deadlines and will qualify for a $6,500 credit. Tom Kelly’s book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com. READER COMMENTS Be the first to comment. You must be a registered user and verify your e-mail address to post comments to blogs or articles on HeraldNet. To register, click here. To read other terms and conditions, click here. Log out

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