The IRS had a successful filing season this year, according to a new report, despite the challenges of dealing with economic stimulus provisions passed in the midst of tax season, such as an expanded First-Time Homebuyer Credit.

The report by the Treasury Department’s Inspector General for Tax Administration on the filing season identified more than 1.1 million tax returns on which taxpayers were allowed more than $7.8 billion in First-Time Homebuyer Credits. Of those, 958,058 (85 percent) were filed electronically and 171,422 (15 percent) were filed via paper.

The American Recovery and Reinvestment Act of 2009, which was passed in February, increased the size of the credit to a maximum of $8,000 from $7,500, giving a boost to the faltering housing market.

The tax credit was projected to cost the government up to $15 billion and is set to expire on Dec. 1. However, Congress is weighing a plan to extend it. Sen. Johnny Isakson, R-Ga., and Senate Banking Committee Chairman Christopher Dodd, D-Conn., are sponsoring a proposal that would extend the credit to June 20, 2010, remove the first-time home-buying requirement, and expand the eligibility requirements. They may attach the proposal to a bill that would also extend unemployment benefits.

TIGTA noted that the IRS faced challenges in administering the program, however. As of May 29, 2009, TIGTA identified over 70,000 First-Time Homebuyer Credits totaling over $489 million that were claimed by individuals who did not appear to qualify for the credit.

IRS management disagreed with a TIGTA recommendation that would have required taxpayers to provide third-party documentation supporting the purchase of a home. The IRS management concluded that such a requirement would be burdensome and would prevent up to 2 million taxpayers from e-filing.

TIGTA also said in its report on the 2009 filing season that the IRS had received more than 133.6 million individual tax returns through May 29, 2009. Of those, 91.7 million were filed electronically and 41.9 million were filed on paper.

“The IRS is to be commended for its work in implementing significant tax law changes during the 2009 filing season,” said TIGTA Inspector General J. Russell George in a statement.

TIGTA identified a 36.7 percent decrease in use of the Free File Program, a free tax return preparation and e-filing program for eligible taxpayers developed through a partnership between the IRS and tax software companies. The IRS believes the decrease is due to a later start to the 2009 filing season, the migration of taxpayers to other free offers in the marketplace and the elimination of e-filing fees by some software providers. 

In addition, although the IRS initiated a number of efforts to educate and assist individuals who were confused in computing the Recovery Rebate Credit, the credit resulted in a significant number of taxpayer errors. The Recovery Rebate Credit is a one-time benefit for people who didn’t receive the full economic stimulus payment last year. Of the 114.3 million tax returns processed as of April 17, 2009, 16.7 million (14.6 percent) included at least one error in the credit that needed to be addressed by the IRS Error Resolution function (8.4 million contained a Recovery Rebate Credit error).

This exceeded the total number of tax returns the IRS estimated would go to the Error Resolution function by 9.8 million tax returns (142 percent). The Error Resolution function took steps to ensure there would be no delays in correcting the errors that would affect the IRS’s ability to meet its completion date for processing and issuing tax refunds.

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