Problems with administering the First-Time Homebuyer Credit and similar tax credits indicate the Internal Revenue Service needs to strengthen its controls over all refundable credits, a new government report recommended Friday.

The report, from the Treasury Inspector General for Tax Administration, found that the IRS did not ensure appropriate controls were established before initiating the processing of claims for the homebuyer credit. As a result, taxpayers received some $513 million in homebuyer credits for which they most likely did not qualify.

Homebuyers who purchased a home in 2008, 2009 or 2010 were able to take advantage of the homebuyer credit, allowing eligible taxpayers to claim up to an $8,000 refundable credit on their tax returns. TIGTA reviewed whether the IRS had controls in place that effectively identified erroneous claims for the homebuyer credit.

In interim reports issued in September 2009 and June 2010, TIGTA discussed several key controls that were not in place to detect and prevent the issuance of fraudulent homebuyer credits. The IRS needed to put filters in place to identify questionable claims for the credit before they were processed, and a requirement for documentation to substantiate the purchase of a home.

In response to the earlier reports, the IRS stated that it did not have math error authority to disallow the homebuyer credit during processing even if it asked for documentation and none was provided. The Worker, Homeownership, and Business Assistance Act of 2009 (Pub. L. No. 111-92, 123 Stat 298) was enacted on Nov. 6, 2009, which granted the IRS math error authority to deny homebuyer credits if proper documentation was not provided by the taxpayer, but implementation of the filters and passage of this legislation occurred after many fraudulent and erroneous homebuyer credits had already been issued.

“The IRS has taken positive steps to strengthen controls and help prevent the issuance of inappropriate homebuyer credits,” said TIGTA Inspector General J. Russell George in a statement. “However, many of the actions occurred after hundreds of thousands of homebuyer credits had already been issued, including fraudulent and erroneous credits totaling millions of dollars. The IRS needs to take a much more timely and proactive approach to prevent fraudulent claims for refundable credits.”

TIGTA made seven recommendations to the IRS, including requiring taxpayers to provide supporting documentation to verify eligibility for all refundable tax credits and seeking legislation providing the IRS with math error authority to deny refundable credits when supporting documentation is not provided. The IRS generally agreed with TIGTA’s findings. However, TIGTA believes that the IRS’s corrective actions will not be proactive enough to prevent fraudulent claims for refundable credits.

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