Investigator: IRS paid $513 million in undeserved homebuyer tax credits

WASHINGTON -- The Internal Revenue Service has paid out $513 million in homebuyer tax credits to people who probably didn't qualify, a government investigator said Friday.

Most of the money -- about $326 million -- went to more than 47,000 taxpayers who didn't qualify as first-time homebuyers because there was evidence they had already owned homes, said the report by J. Russell George, the Treasury inspector general for tax administration. Other credits went to prison inmates, taxpayers who bought homes before the credit was enacted and people who did not actually buy homes.

The popular credit provided up to $8,000 to first-time homebuyers and up to $6,500 to qualified current owners who bought another home during parts of 2009 and 2010.

IRS spokeswoman Michelle Eldridge said the agency audited nearly 448,000 returns and blocked or denied nearly 426,000 questionable claims, she said.

In all, the agency's enforcement efforts saved more than $1.3 billion and identified more than 200 criminal schemes, she said.

"The IRS made the credit available within weeks of enactment, even allowing individuals to claim 2009 home purchases on their 2008 tax returns. Where there are questionable claims, the IRS has moved aggressively," Eldridge said. "The IRS continues to audit claims as warranted, and recapture credits that were improperly paid."

The agency questioned some of the inspector general's findings, but said it would follow up on the report.

The tax credit for first-time homebuyers was part of President Barack Obama's economic recovery package enacted in 2009. In November 2009, Congress extended the credit and expanded it to longtime owners who bought new homes.

Homebuyers qualifying for the credit had until April 30, 2010, to sign purchase agreements. They had until Sept. 30 to complete their purchases, after Congress extended the deadline.

The popular tax credit helped to stabilize the nation's slumping housing market. But the extensions and expansion of the credit created a complicated system that made it hard for many taxpayers to determine which credit they qualified for, if any. There were also income requirements.

"The timing and differences in the various legislative provisions also created complexity and confusion for taxpayers and return preparers, as well as the real estate industry," the IRS said in a written response to the audit. "The IRS addressed this challenge by providing timely, understandable, and extensive outreach and education to the public, Nevertheless, this complexity undoubtedly contributed to numerous errors and erroneous claims."

Friday's report is the latest in a series of audits George has conducted on the homebuyer tax credit. It says the agency paid out $513 million in questionable claims for the homebuyer tax credit.

Among the findings:

-- More than 47,500 taxpayers claimed the first-time homebuyer credit even though there was evidence on previous tax returns that they had already owned a home, including deductions for mortgage interest, real estate taxes and mortgage insurance. The report estimated these people claimed $326 million in credits.

-- More than 13,400 taxpayers claimed the credit even though they had not yet purchased a home. These people listed future purchase dates on their tax forms. The report estimated these people claimed $97.8 million in credits. The IRS said it believes these estimates are overstated.

-- More than 1,000 taxpayers said they purchased homes while they were incarcerated in prison, claiming $7.7 million.

-- More than 2,500 taxpayers claimed credits for buying homes for which at least one other taxpayer also claimed the credit for buying. These taxpayers received $11.4 million.

-- More than 2,700 taxpayers claimed credits for homes that were purchased before the tax credit went in effect. These taxpayers received $17.6 million.

-- The IRS disallowed $531,134 in tax credits claimed by 96 taxpayers who were under age 18, making it unlikely they purchased a home.