The First-Time Homebuyer Credit program that kept the housing industry afloat this year also led to hundreds of millions of dollars in fraudulent or erroneous claims.

The program allows a first-time homebuyer to claim a refundable tax credit of up to $8,000. The credit is supposed to expire on December 1, but the real estate and construction industry, and some members of Congress, are pushing to extend and expand the program beyond the cutoff date. However, a new report by the Treasury Department’s Inspector General for Tax Administration uncovered a widespread amount of fraud or misapplication of the credit.

TIGTA’s report found that 19,351 taxpayers claimed $139.4 million in credits for homes they had not yet purchased, but would allegedly purchase in the future. In addition, 70,005 taxpayers claimed more than $479 million in credits, despite indications that they were not first-time homebuyers. TIGTA also 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 four years old.

“Contract law generally exempts children under the age of 18 from being bound by the terms of a contract,” said TIGTA Inspector General J. Russell George in testimony before the House Ways and Means Oversight Subcommittee on Thursday. “Therefore, it is unlikely that these taxpayers would have entered into an arm’s-length transaction for the purchase of a home.”

Congress originally created the credit as part of the Housing and Economic Recovery Act of 2008 to allow taxpayers who purchased a home between April 8, 2008, and July 1, 2009, to claim a credit of up to $7,500. The American Recovery and Reinvestment Act of 2009 extended the credit to homes purchased prior to Dec. 1, 2009, and increased the maximum credit to $8,000.

In November 2008, TIGTA recommended that the IRS use the information provided by taxpayers seeking the credit to verify their eligibility. TIGTA also recommended that the IRS require taxpayers to provide documentation to verify a home purchase, such as a U.S. Department of Housing and Urban Development Settlement Statement issued to homebuyers at closing. The IRS disagreed with both recommendations, stating that other strategies being employed would mitigate TIGTA's concerns.

TIGTA is blaming the IRS’s inaction on its recommendations for the large number of fraudulent credits.

"Steps taken by the IRS prior to the 2009 filing season were not sufficient to prevent waste, fraud, error and abuse," said George in a statement. "The IRS should immediately implement TIGTA's recommendations in order to prevent further fraud and abuse of First-Time Homebuyer Credits."

IRS deputy commissioner for services and enforcement Linda Stiff defended the agency’s record during the congressional hearing. “In administering the FTHBC program, the IRS has undertaken significant outreach to ensure that taxpayers are aware of the benefit, developed new forms and instructions to allow taxpayers to file the claim, and instituted significant compliance programs to ensure that those claims are valid,” she said in her prepared testimony. “As with any tax credit, the IRS must run a balanced program aimed at delivering the benefits that the legislation provides, while ensuring that appropriate controls are in place to minimize errors and fraud.”

As of Aug. 22, 2009, over 1.4 million taxpayers have claimed the credit for homes purchased in 2008 and 2009, representing foregone tax revenue of about $10 billion, according to preliminary IRS data cited in a report by the Government Accountability Office. Fifty-nine percent of the taxpayers claiming the credit had an adjusted gross income of less than $50,000 and the credit was disproportionately claimed by taxpayers in the $25,000 to $100,000 AGI range.

Rep. John Lewis, D-Ga., chairman of the House subcommittee holding the hearing, said afterward that he had introduced legislation to give the IRS extra authority to identify and block dubious claims for the credit and require taxpayers to provide documents with their tax returns to prove they had legitimately claimed the credit.

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