Nearly 1,300 prisoners claimed over $9 million in First-Time Homebuyer Tax Credits, according to a new government report.

The Treasury Inspector General for Tax Administration said in the report that errors and fraud are continuing to plague the First-Time Homebuyer Tax Credit program, despite efforts to curtail previously identified problems. In addition, TIGTA estimates that 14,132 individuals received erroneous credits totaling at least $26.7 million, including 2,555 taxpayers who received inappropriate homebuyer credits totaling $17.6 million for home purchases made prior to the dates allowed by the law. Over 80 of the improper credits were claimed by IRS employees.

The report found that $9.1 million went to 1,295 prisoners who were incarcerated at the time they reported that they purchased their home. These prisoners did not file joint returns, so their claims could not have been the result of purchases made with or by their spouses. Further, TIGTA found that 241 prisoners were serving life sentences at the time they claimed that they bought new primary residences.

“This is very troubling,” said TIGTA Inspector General J. Russell George. “Congress created and modified the Homebuyer Credit to stimulate the economy and help taxpayers achieve the American Dream, not to line the pockets of wrongdoers.”

The IRS said it would take action to recapture the payments to prisoners. "In swiftly making the First Time Homebuyer Credit immediately available to more than 2.6 million homebuyers, a very small number of payments were made to prisoners incorrectly, which the IRS is now taking all steps to recapture and to prevent going forward," said the IRS in a statement.. "The IRS will follow up on every instance of an improper prisoner payment and take swift and appropriate enforcement actions."

The IRS noted that it does not have access to reliable, accurate data on all prisoners and wants Congress to enact legislation that would give it data on all federal, state and local prisoners.

TIGTA acknowledged that the IRS had curbed some abuses of the tax credit.

“The good news is that the IRS has made significant strides resolving problems associated with this program,” said George. “For example, no minors received the credit, according to our report. However, the bad news is that prisoners are allegedly improperly receiving the credit for buying homes while they are incarcerated. While the IRS has taken a number of positive steps to strengthen controls and help prevent inappropriate credits from being issued, our audit found that additional controls are necessary to address erroneous claims for the credit.”

Congress passed a series of legislative provisions that enabled first-time homebuyers to claim a refundable credit on their 2008, 2009 or 2010 individual federal tax returns. The credit is equal to 10 percent of the purchase price of the home, limited in most cases to $8,000. Initially, the credit served as an interest-free loan of up to $7,500 to be paid back over a 15-year period. However, subsequent legislation excluded the pay-back requirement. According to the IRS, 1.8 million taxpayers received $12.6 billion in Homebuyer Credits through the end of February 2010.

TIGTA issued an earlier report in September 2009 that found fraudulent claims for the tax credit, including by minors (see Audit Finds $636M in Bogus Homebuyer Tax Credits). While the IRS has taken steps to improve its oversight of the program since the earlier report, TIGTA’s new report found a significant amount of fraudulent and erroneous payments in the First-Time Homebuyer Credit Program. 

In its new report, TIGTA found that 10,282 taxpayers received credits for homes that were also used by other taxpayers to claim the credit. In one case, TIGTA found that 67 taxpayers were using the same home to claim the credit. TIGTA auditors have not fully quantified the total of these erroneous credits, but all indications are that the total will be in the tens of millions of dollars.

Some of the improper payments involve IRS employees, TIGTA found. At least 34 IRS employees claimed the credit despite indications that they owned a home within the past three years. This is in addition to the 53 IRS employees that TIGTA identified in August 2009. TIGTA’s Office of Investigations continues to investigate all of these cases.

At least one lawmaker reacted with outrage to the report. “Last year, we learned that children and persons who did not purchase homes were fraudulently claiming the First-Time Homebuyer Credit,” said Rep. John Lewis, D-Ga., chairman of the House Ways and Means Oversight Subcommittee. “In response, we provided additional authority to the IRS to administer the program. Although I am pleased that the fraud identified earlier does not continue, I am concerned about prisoners claiming the credit. I am also disturbed by 67 people claiming the credit for a single address and millions of dollars claimed by people who purchased homes before the program started. The report highlights the need to remain vigilant in this area. We are committed to working with the IRS and TIGTA to address and eliminate fraud with respect to all federal tax provisions."

TIGTA recommended that the IRS conduct an analysis to identify multiple taxpayers claiming the same home for the credit and perform post-refund examinations to ensure that refunds for the invalid claims are recovered, and identify claims for homes purchased prior to the effective date of the legislation. In addition, TIGTA recommended that the IRS increase its scrutiny of questionable claims for the Homebuyer Credit on amended tax returns and improve the collection of data on the national prisoner population. The IRS agreed with the recommendations.

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