First-Time Fakes: Frauds Hit Homebuyer Tax Break

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Thousands of people have gotten first-time homebuyer tax credits they don't deserve — either because they haven't yet bought a home or because they already own one. The IRS's internal watchdog says the agency needs to do a better job of ferreting out fraud before cutting checks, and a congressional committee is now getting involved.

Some of these suspicious claims come from people who are writing off interest payments on another house. That's a pretty strong sign that they already own a home.

Russell George, the inspector general who watches over the IRS, is bewildered by the way the agency set up the program.

"This is one of the largest refundable credits in the history of the Internal Revenue Service," George says. "As they are well aware, there are people who do not want to pay taxes. If you give them any opportunity to avoid paying it, certain people will."

In a recent audit, George's office highlighted nearly $500 million in homebuyer tax credits claimed by people who don't appear to qualify.

At the House Ways and Means Committee hearing Thursday, George is expected to release another, more damning report. His biggest complaint — and something he's been talking about for months — is that the IRS doesn't require people applying for the credit to prove they've purchased a house.

George says, "If the IRS were to require documentation of the purchase of a home, that would serve as a major disincentive to people who would otherwise fraudulently claim the credit."

But the IRS has resisted that move.

"It wouldn't necessarily give us the ability to automatically disallow the claim," says Frank Keith, a spokesman for the IRS.

He says the IRS doesn't have the authority to reject a claim for the tax credit without doing a full audit first. Keith says his agency has flagged more than 100,000 tax returns for a second look.

"I think we'll find some where the taxpayer perhaps has made an honest mistake," Keith says. "And I think we'll find those cases in which the taxpayer has intentionally filed a claim for a credit knowing full well that they weren't eligible."

On Wednesday, a tax preparer in Florida was sentenced to 30 months behind bars for filing false tax returns. He claimed the homebuyer credit for 15 of his clients, and told some of them they could qualify even if they were merely thinking about buying a house.

"It's being touted as free money," says Bill Lazor, a certified public accountant from Kingston, Pa. "If it's so easy to get, that makes the bad guys devise schemes to help people get the credit who shouldn't have it."

The popular tax credit is nearing its expiration date, and some are pushing Congress to extend and even expand the program. The House committee hearing will examine what to do about the fraud.

"I am very disturbed by the inspector general indicating that there might have been more than 70,000 claims by people who were not purchasing their first home," says Rep. Earl Pomeroy (D-ND). "If somehow they are being routinely allowed the credit, we've got a major problem here. We've got to stop it."

The National Association of Realtors loves the credit and doesn't like the talk of fraud.

"That kind of thing is to the detriment of a very workable tax credit plan to help homebuyers get into the market," says the association's Lucien Salvant. "It's starting to stabilize prices in the housing market, and that's something everybody wants."

If the tax credit is extended, new measures likely will be included to make sure the only people who get a tax credit are the ones who deserve it.

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