IRS Let Homebuyers Improperly Claim Tax Credits on Amended Returns
Some taxpayers received multiple refunds for their First-Time Homebuyer Tax Credit claims, while others changed the acquisition date of their homes on their amended returns to avoid having to repay the refunds they had improperly claimed, according to a new report.
The report, by the Treasury Inspector General for Tax Administration, said the Internal Revenue Service needs to do more to prevent erroneous claims for the tax credit fr om getting through on amended tax returns. The IRS has taken some steps to prevent fraud in the program, the report acknowledged. However, some of those fraud control steps have also resulted in legitimate claims for the First-Time Homebuyer Tax Credit from being processed on a timely basis (see IRS Works on Fix for Homebuyer Credit Tax Refund Problems).
As part of the federal government’s efforts to stimulate the housing industry and the broader economy, any taxpayers who purchased a home in 2008, 2009, or 2010 were able to claim up to an $8,000 refundable credit on their tax return. The Homebuyer Credit can come in the form of an interest-free loan or a fully refundable tax credit, depending on when the taxpayer purchased the home. Taxpayers have several filing options available to help them claim the credit, one of which is filing an amended tax return. The IRS reported that as of Jan. 29, 2011, it had processed more than 1.4 million amended claims for homebuyer tax credits totaling more than $10 billion.
TIGTA reviewed whether the IRS had controls in place to ensure that the homebuyer tax credits claimed on amended individual tax returns on Forms 1040X were processed the right way. The report found that some taxpayers inappropriately changed their home acquisition date on amended returns to avoid repayment of the tax credit.
TIGTA identified 1,225 cases in which a taxpayer originally filed a claim for the homebuyer credit on a tax year 2008 Form 1040 using a calendar year 2008 purchase date, and the IRS subsequently processed an amended return for the taxpayer claiming a change to the original homebuyer credit with an identifier now indicating a calendar year 2009 or 2010 purchase year. TIGTA took a closer look at a sample of 43 of those 1,225 claims, and found that 22 appeared to be legitimate changes of purchasing years, while 15 appeared to be invalid.
In another 607 cases, the taxpayer’s homebuyer credit was originally claimed on an amended return reporting a home purchased in calendar year 2008, but a subsequent amended homebuyer credit claim was processed with an identifier indicating a calendar year 2009 or 2010 home purchase. TIGTA again examined a sample of 45 of those cases, and found that in 36 of them, the year of purchase on the original amended return had been recorded inaccurately by IRS computers or employees, and another nine cases in which the taxpayer amended the year of purchase for various reasons.
Some taxpayers also received multiple refunds of the homebuyer credit that exceeded the amounts allowed by law, the report noted, and many questionable claims for the homebuyer credit were not appropriately sent to IRS examiners for scrutiny. TIGTA identified 70 taxpayers who received a homebuyer credit for both tax years 2008 and 2009.
“While in response to our previous recommendations, the IRS took a number of positive steps to process homebuyer credits claimed on amended returns, this report found additional issues related to the credit,” said TIGTA Inspector General J. Russell George in a statement. “Additional controls are needed to prevent inappropriate claims on amended returns.”
TIGTA also found that the IRS paid an estimated $37 million in interest on claims for the time period prior to the actual home purchase dates. It is unclear whether Congress intended for this interest to be paid. Finally, some claims for the homebuyer credit were significantly delayed. Accounting Today readers have reported that some of their clients are still waiting for refunds on credits claimed last tax season.
TIGTA recommended that the IRS implement procedures to identify taxpayers who change the year when their home was purchased or receive more homebuyer credits than they are entitled to, and recover invalid claims through examinations.
The report also suggested that the IRS should ensure that employees receive proper training and perform quality reviews of homebuyer credit claims. The IRS should also identify interest-related issues on any future legislation and work with the Treasury Department’s Office of Tax Policy to request clarification from Congress, if warranted. In addition, the report said the IRS should ensure that timeliness standards are adhered to when cases are referred to IRS examiners.
IRS management agreed with TIGTA’s recommendations and has initiated corrective actions to address them. In response to the report, the IRS emphasized that when the original homebuyer tax credit legislation was enacted, Congress intended to deliver the benefits of the tax credits quickly. The IRS recognized the need to deliver the benefits on a timely basis, while ensuring that the appropriate controls and filters were in place to minimize fraud. Later when the 2009 Recovery Act was enacted, the IRS also had to implement a procedure for processing amended returns claiming the First-Time Homebuyer Credit.
“The IRS faced significant challenges with amended FTHBC returns, as well as with original returns claiming the credit,” wrote IRS Wage and Investment Division commissioner Richard Byrd Jr. “We immediately took action to ensure the controls, developed and implemented for original FTHBC return processing, were mirrored in the processing of amended returns.”
Through the end of March 2011, the IRS processed over 4 million FTHBC claims and provided over $28 billion to homebuyers, he noted. The IRS also closed nearly 450,000 examinations, “protecting over $1.4 billion in revenue, including examinations of over 225,000 amended returns wh ere over $820 million was protected.”